The private equity industry had another robust year in 2016 in which it raised $370bn, marking the fourth consecutive year in which fundraising has surpassed $300bn. One reason for the abundant LP demand is the comparably strong performance over the last several years and the recent high level of cash delivered back to LPs in recent years. Another contributing factor may be the rally in the US equity markets that has been underpinned by the Trump administration’s promises of tax cuts, deregulation and increased infrastructure spending. These factors may help explain why investors remain an average of 110bps short of their target allocation to private equity compared with the same time last year.
While market participants are generally optimistic about the asset class, there are potential challenges the industry will face in the coming years. Cited as the chief concerns by surveyed fund managers in December 2016, high levels of dry powder and competition in the market are increasing valuations, which could also affect the exit environment and the eventual performance of vehicles, with these factors set against an uncertain geopolitical backdrop and volatility in global markets.
Nevertheless, as shown in the Preqin Investor Outlook: Alternative Assets, H1 2017, 40% of institutional investors interviewed planned to invest more capital in private equity over the next 12 months than they did in the previous 12 months, while only 11% intend to reduce that amount. When asked about their plans over the longer term, an even greater proportion (48%) of LPs anticipated increasing their allocation to the asset class. Despite the challenges, 58% of GPs surveyed perceived an increase in investor appetite for private equity over the past 12 months.
Firms are eager to capitalize on the demand for private equity, with record numbers of private equity funds in market at the start of the year. There were 1,829 funds seeking to raise $620bn in capital commitments from investors, a 28% increase in targeted capital from a year ago. Much of this growth can be attributed to SoftBank Group attempting to raise the largest private equity fund ever. The Japan-headquartered technology company is seeking $100bn for Softbank Vision Fund and will focus on investing in market-leading companies in the global technology sector, including emerging technologies such as artificial intelligence and the ‘Internet of Things’.
For further information about fundraising in 2016 and investor attitudes towards the private equity industry, please refer to the recently released 2017 Preqin Global Private Equity & Venture Capital Report.