Private equity has enjoyed a period of unprecedented success over the past decade, and the asset class is continuing to grow in importance, not only for institutional investors but also the wider economy and society as well. Four core themes underpin this growth.
Four pillars of success
1: The private equity governance model has proved uniquely powerful and fundamental to successful outcomes. Combining closely engaged medium- to long-term active owners that possess capital, skills and energy to support the growth of investee companies and the alignment of interests throughout the ownership chain will drive successful outcomes.
2: Meeting return requirements in an increasingly low-return environment is a significant challenge for investors to overcome.
3: Private equity has delivered strong risk-adjusted returns ahead of the public market for an extended period. The Global Financial Crisis (GFC) proved to investors that the asset class can deliver in both good times and bad.
4: Since 2011, strong distributions have provided investors with a wave of cash, resulting in a superior fundraising environment – investors have had to increase the rate of new commitments to keep up with the capital being distributed back to them.
Combined, these four factors have helped to drive private equity AUM over the past decade from $1.57tn as at December 2008 to $3.41tn as at June 2018, firmly cementing its place in investors’ portfolios across the globe.
What does this extended period of success mean for the industry in 2019 and beyond?
Signs of slowing
Points one and two remain firmly in place. The industry will continue to develop its governance and skillset, improving the quality and assurance of outcomes for investors, and the need from investors for superior relative returns is greater than ever.
The outperformance of the asset class is also likely to continue. Although 28% of fund managers are lowering their return targets, and 30% of investors feel that returns will be lower in 2019 than 2018 as a result of today’s challenging high valuations environment, many also believe that, relative to other asset classes, private equity will continue to deliver and will remain a core and increasing part of their portfolios.
However, the fourth factor – net cash flows for investors – has changed. For the first time since 2010, more capital was called up ($500bn) in 2017 than distributed ($495bn), and while this reversed again in the first half of 2018 (the latest data available) with a positive net cash flow of $67bn, it remains to be seen whether this continued for the remainder of the year.
A cautious mood therefore hangs over the industry as we enter 2019: investors largely feel assets are fully priced and many anticipate a market correction imminently; and with distributions falling, they no longer have the need to commit to private equity funds at such a pace.
Although fundraising exceeded $400bn for the fifth consecutive year in 2018, a respectable achievement, the $432bn secured by 1,176 funds is much lower than the record $566bn raised in 2017. Furthermore, as we enter 2019, more funds are in market (3,749) seeking more capital ($971bn) than ever before, setting up a challenging year ahead for those seeking commitments. However, investors are aware that private equity will likely continue to deliver superior returns relative to other asset classes and are generally looking to increase their allocations over the next 12 months (31% of surveyed investors) and longer term (46%). However, with an abundance of opportunities to choose from, the challenges not only lie with fund managers in attracting the capital, but also with investors in knowing where to place it.
For expert commentary, key trends, historical statistics and survey results, take a look at the newly-released 2019 Preqin Global Private Equity & Venture Capital Report – the most complete and in-depth review of the industry available.