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Intense Competition Between GPs Could Impact Returns: Preqin

By Mani
Updated on

Thanks to increasing competition between GPs, it will be more difficult to find attractive investment opportunities and returns will be impacted together with investor appetite, notes a Preqin survey.

After surveying 260 private equity and venture capital fund managers in November 2014 to gain insight into current issues impacting the industry and their outlook for 2015, Preqin published a report titled: “Fund Manager Outlook for 2015”.

Competitive buyout deals landscape

According to the Preqin’s latest survey, a significant proportion of surveyed respondents highlighted fundraising, valuations, performance, exits and ongoing volatility and uncertainty in global markets as some of the biggest challenges facing the private equity and venture capital industry in 2015. As demonstrated in the following graph, the surveyed firms felt that regulation and valuations were the most significant challenges they will face:

The survey notes the respondents’ views are understandable considering the arrival of the AIFMD and the competitive buyout deals landscape driving high prices. However, most surveyed venture capital managers listed performance as the key issue over the next year, signifying that these managers are still feeling the pressure to deliver consistent returns to their investors.

Preqin’s survey also points out that the private equity deals market has been witnessing strong deal flow recently, following a general shift in macroeconomic conditions post-crisis. The survey highlights that the increased availability of debt and growing dry powder levels are likely to put pressure on pricing levels, which may impact the returns witnessed by fund managers, and in turn, investors.

The survey notes the enhanced competition and pricing will emphasize the need for funds to develop differentiated ways of creating value in order to deliver strong returns in a challenging market. As can be seen in the following graph, an overwhelming majority of GPs (83%) are finding today’s market more difficult to navigate:

Difficult market to navigate GPs

GPs: Increased investor appetite

As seen in the following graph, Europe and North America are the most prominent geographic regions from which fund managers are seeking investor capital. The Preqin survey notes that a third (36%) of GPs that responded to the survey are looking to source capital commitments from Asian LPs, and a fifth (21%) from MENA-based investors:

Regions from which fund managers seek capital GPs

Preqin’s survey points out that this trend demonstrates the significance of these less-mature private equity and venture capital regions as a source of capital for fund managers.

According to the report, a majority (57%) of survey respondents indicated they had seen an increase in investor appetite compared with 12 months ago:

Change in investor appetite GPs

The Preqin survey reveals that GPs have witnessed increases in appetite for the asset class in the last 12 months from a range of investor types, particularly family offices, with 60% of respondents confirming an increase in appetite:

Family office's more appetite for PE GPs

Turning its focus on to regulatory reforms, Preqin’s survey highlights that a number of respondents indicated that the increased bureaucracy created by new laws complicated their processes. Fund managers say they are under pressure from a number of regulations, including the Alternative Investment Fund Managers Directive (AIFMD), Foreign Account Tax Compliance Act (FATCA) and Dodd-Frank. Citing AIFMD compliance as an example, the survey notes the largest proportion (41%) of participant firms expressed concern towards the cost of AIFMD compliance.

AIFMD Compliance GPs

Striking an optimistic note, the Preqin survey notes 66% of the surveyed fund managers are already in market with a new private equity fund or planning to launch a vehicle in 2015:

Timeline to launch a new PE fund GPs

Similarly, the majority of fund managers are looking to deploy more capital in the next 12 months compared to 2014:

More capital deployment GPs

The survey also highlights that despite increasing investor appetite across the spectrum of LP types, competition is increasing between GPs, pushing pricing levels up and making it more difficult to find attractive investment opportunities.

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