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Investors Grow Concerned About Private Equity

The tides are beginning to turn for the much sought-after asset class as valuations reach new heights.

  • Alicia McElhaney

Private equity may be starting to fall out of favor with investors, according to a new Preqin report.

As recently as December 2016, 84 percent of investors surveyed by the data provider had viewed the asset class positively. But in Preqin’s June investor survey, this figure plummeted to 58 percent.

This shift in allocator sentiment toward private equity investing is likely the result of rising valuations on assets, which investors believe will lead to lower returns in the long run, according to Preqin.

“With portfolio company valuations high and deal flow becoming more of a challenge for the industry, some investors are concerned about the possible impact of these developments on their portfolios,” the report stated.

According to Preqin data, 86 percent of investors now believe asset valuation is a key issue facing the private equity industry today, up from 70 percent of investors in December 2016. While Preqin said higher valuations may benefit the fund managers that are able to exit their investments at current prices, nearly half of polled investors predicted these valuations would lead to lower returns over the long term. Just 25 percent believed returns would increase.

Allocators surveyed in June reported that it has already become more difficult to find attractive opportunities in the private equity sector, with 57 percent saying sourcing investement opportunities is harder now than it was 12 months ago. None of the survey respondents reported that finding opportunities had become easier, due in part to increased competition among limited partners for access to oversubscribed funds.

[II Deep Dive: Private Equity Asset Prices Soar as Number of Deals Falls]

Still, concerns about valuations have yet to deter investors from pouring capital into the asset class. According to Preqin, over a third of investors plan to allocate more capital to private equity strategies in the twelve months following June 2017 than they did in the year prior. And those allocators are hoping to put large amounts of capital to work: 51% of investors who are increasing their allocation said they planned to invest more than $100 million in the asset class over the next year.

Although the proportion of investors who plan to invest less in private equity grew by eight percentage points to 19 percent between December and June, Preqin noted that this figure remained lower than the percentage of investors decreasing allocations to hedge funds, venture capital and real estate.