Private Equity Loses Luster

Investors have dimming expectations for private equity performance, eVestment found.

Illustration by II

Illustration by II

More investors are lowering their expectations for private equity than any other area of private markets, according to an eVestment survey.

Fifty-two percent of investors probed by the data provider are expecting private equity returns to fall over the next three years. Venture capital ranked second in drawing the strongest weight of opinion against it, with 47 percent of investors predicting lower returns from the asset class.

Competition for deals has intensified after record fundraising in private markets, making this a top concern for investors and fund managers, the survey found. High valuations may dampen returns, particularly as a majority of those surveyed expect a significant market correction within two years.

“We’ve been in very buoyant markets for some time,” Graeme Faulds, eVestment’s product director for private markets business, said in a phone interview. Investors are more worried about valuations than fund managers, he said, reflecting managers’ confidence in driving performance despite paying higher prices for companies.

Thirty-eight percent of investors such as pensions and endowments are “very concerned” about private market valuations, eVestment found. Many fund managers had a starkly different perspective, with 36 percent saying they had “no concern” about valuations.

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Data provider eVestment surveyed institutional investors, consultants and private capital fund managers globally early this year. The investors queried oversee more than $765 billion in assets, including more than $131 billion of private capital, according to eVestment’s report on its findings. The fund managers control more than $600 billion in private markets assets, with 20 percent of them managing investments in more than one strategy.

“Real assets and infrastructure were strategies that investors were most bullish on,” eVestment found. Institutional investors were less optimistic about real estate, which ranked third behind venture capital and private equity based on the percentage of investors expecting declines in returns.

Despite their concerns, investors think they’ll reap double-digit returns from private markets.

They’re expecting a median 13 percent net return from private equity and a 14 percent gain from venture capital over the next three years, according to eVestment. They expect real assets will produce the third-best performance in private markets, with a median return of 10 percent.

Meanwhile, about 75 percent of investors plan to maintain or decrease the number of relationships they have with fund managers.

Social media may increasingly factor into investors’ due diligence for selecting managers, according to Faulds. They’re screening for reputational risks, he explained.

More than half the investors surveyed this year view social media reviews as anywhere from “slightly important” to “extremely important.” This is the first time eVestment asked them to weight social media as part of their qualitative due diligence, said Faulds, adding that next year the firm could dig deeper into the trend.