After reaching record heights in industry assets under management (AUM) in 2017, Preqin predicts that private equity will spearhead significant growth in the wider alternatives industry over the next five years. Superior returns over the long term have attracted more and more investors to the asset class, and encouraged existing investors to up their allocations. Going forward, as investors demand more control over their investments, and more high-net-worth individuals look for access to alternatives, technological innovation in the alternatives space may provide ample opportunity for further growth. Substantial proportions of fund managers Preqin surveyed believe that technological developments – such as AI and machine learning – could benefit their operations in many areas of business, including fundraising, portfolio management and investor relations.
The industry certainly has a history of successfully adapting to new challenges and evolving to thrive more than just survive, and AUM has increased exponentially since 2008. So why should this growth not continue? From a total of $3.1tn under management as at the end of 2017, Preqin anticipates industry growth of 58% over the next five years, reaching $4.9tn by 2023. This is the greatest injection of capital in dollar terms expected among all alternative asset classes.
Although Preqin believes that the number of alternative assets fund managers will rise in the next five years, the majority (79%) of private equity fund managers surveyed by Preqin anticipate some or significant consolidation in the industry by 2023, as managers look to strengthen their value proposition going forwards. Over the next five years, more than half (51%) of all private equity managers surveyed intend to seek capital investment to expand their offerings – when examining respondents by primary strategy, this trend is noticeably more marked among venture capital managers (66%) than buyout managers (25%). Notably, 94% of buyout fund managers expect organic growth to drive their firm’s future success.
Such growth can, of course, only be facilitated by increasing demand from investors. So, what are their plans? Among investors surveyed by Preqin in June 2018, 79% intend to increase their allocations to private equity over the next five years – this is the largest proportion among all alternatives. Only 2% expect to decrease their allocations, leaving 20% that intend to maintain a similar level. These are encouraging statistics for the industry, and suggest that private equity will play an even more important role in institutional portfolios in the years to come.
Across alternatives, it is widely believed that emerging markets are on the rise, with an improving outlook for returns, among other factors, driving investor interest in regions such as China, India and emerging Asia in particular. Among alternatives fund managers surveyed, 46% feel emerging markets will present the best opportunities in 2023.
Private equity investors and fund managers are united in the view that environmental, social and governance (ESG) practices and policies will become more important over the next five years, as cited by 81% and 83% of respondents respectively. Investors clearly believe ESG is integral to their investment decision-making, and private equity firms recognize the importance of this, so we expect a greater focus on responsible investing and ESG reporting going forwards.
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