The levels of private equity fundraising have undeniably been affected by the outcomes of financial downturn; however we have seen signs of investor confidence in the asset class improving in the first half of 2011. Our June 2011 study of investor attitudes to private equity indicated that, at that time, almost two-thirds of investors had made new commitments in the year, 57% of LPs interviewed planned to make new fund commitments before the end of 2011. Despite this, the recent developments in the Eurozone and worldwide economic volatility have prompted further questions about the future of the private equity industry.
In order to determine investor sentiment towards current opportunities being offered by GPs, and whether the recent instability in the financial markets has changed their attitudes towards the asset class, Preqin interviewed a sample of 70 investors from across the world in October 2011.
We learnt that the attitudes of 64% of LPs have not been affected by the latest difficulties within the global economy. In fact, 23% of investors we spoke to found the private equity industry more positive in the light of recent market fluctuations, compared to a smaller 14% of LPs that feel more negative towards the asset class. As an example, a US-based foundation told us: “We have a more positive view of private equity because the public markets are more volatile; private players are in a better position to see where opportunities are, and they also have the time to dedicate to these opportunities.”
A number of investors we spoke to felt that the private equity market has changed and many believe that the ongoing economic instability has opened up new investment opportunities. One UK-based pension fund, for example, stated that in light of the recent market distress the investment opportunities have altered and [for them] “Emerging markets are more attractive at the moment and as such, we have increased our allocation to investments in those regions”. Others suggested mezzanine and distressed debt as areas offering good investment opportunities in this climate.
Even though LPs remain optimistic towards private equity, with 92% expecting to maintain or increase their allocation to private equity in the long term and only 8% intending to decrease it, investors remain highly selective when seeking fund managers to invest with. One Swedish pension fund commented: “There are still interesting opportunities out there, but now is the time to focus much more on due diligence and the quality of managers.”
The financial downturn has undoubtedly prompted many LPs to re-evaluate their private equity strategies, and many have become more cautious and selective when choosing fund managers to invest with. This new breed of more prudent investors appear to remain resilient about the private equity asset class, despite recent volatility, and many believe that there are good investment opportunities ahead, as long as the right fund managers are selected.