Private Equity Poised for Inflows but Managers Have Work to Do

by Angela Sormani

  • 01 Jul 2019
  • PE

The private equity coffers of institutional investors in private equity are by no means dwindling, as LPs continue to boost their exposure to the private equity market. Preqin surveyed active private equity investors in June 2019, 74% of which are planning to commit more or the same amount of capital to the asset class over the next 12 months compared with the past year. Fund managers will need to get creative to put this capital to work, uncovering the deals to generate the level of returns needed to continue attracting LPs to the asset class.

The Dangers of Capital Overhang
Dry powder in the private equity industry has seen consistent growth, almost doubling in value in the past 10 years from $670bn at the end of 2009 to $1.28tn as of June 2019, as seen in the chart below. But, while this is indicative of a strong and stable industry, investors and fund managers alike are increasingly concerned that if this rate of growth continues there may soon be too much capital chasing too few deals.

 *Other Private Equity includes balanced, co-investment, co-invest multi-manager, direct secondaries and turnaround funds. 

The overhang of capital available for private equity deals may well pose risks to investors seeking to achieve the required returns on their investments. Private equity fund managers face a difficult challenge and must decide whether to start putting this capital to work despite the record-high valuations, or to hold out for more attractive deals. Our survey reveals that over three-quarters (79%) of investors feel asset valuations pose a threat to return generation at present; in comparison, 59% cited competition for deals as a key challenge.

A Strong Exit Environment
On the other side of the coin, continuing capital flows into the asset class will likely produce a boom in portfolio company exits, and the way in which these exits are executed will become increasingly sophisticated. Portfolio company exits to private buyers may also increase, further strengthening private market activity. Our survey suggests that investors are not concerned with private equity portfolio performance at present: 93% of respondents told us their investments had either exceeded or met their expectations in the past year.

Buyout Boom Ahead
Of the $1.28tn available globally for investment in the private equity industry, buyout funds hold the lion’s share, with some $740bn waiting to find a home for investment. According to recent Preqin investor news, Europe-focused buyout vehicles are certainly dominating the headlines. Danske Private Equity announced it is looking to deploy around €200mn in small- and mid-cap buyout funds; AP-Fonden 2 plans to invest up to SEK 500mn in mid-, large- and mega-cap buyout vehicles and bridge funds; and German multi-family office Circle Eleven plans to target buyout, growth and turnaround vehicles in Europe. LPs are evidently planning for strong, high-quality deal flow in the buyout sector for the future.

Preqin currently tracks over 5,900 institutional investors with exposure to the private equity asset class, with a cumulative allocation of approximately $2.1tn. For more information on our investor data, take a demo today of Preqin Pro.

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