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LPs Eye Investments in Venture Capital and Growth Equity Amid Record VC Dealmaking

Investors reported a surge of interest in the two private assets classes in a recent survey.

At this point in the pandemic, institutional investors are ready and willing to make additional investments in private markets, particularly through venture capital and growth equity investments, according to Eaton Partners.

The fund placement agent, which is part of Stifel Financial, on Wednesday released its latest limited partner pulse survey, which questioned LPs about their views on alternative investments. When asked about how soaring public market valuations have impacted their opinions of private market investments, over half of participants reported that private markets look more attractive to them now. This figure indicates a shift from the firm’s September 2020 pulse survey, which found that nearly half of investors were not currently looking to make changes in their capital market allocations. 

According to the new survey, investors are increasingly looking to buyouts, growth equity, and venture capital above other private asset classes. Sixty-one percent of survey respondents reported plans to up their buyout allocations, roughly consistent with the proportion who planned to do so in September. Venture capital, meanwhile, saw a notable increase in LP interest, with 61 percent eyeing further commitments, up from 41 percent seven months ago. Growth equity also drew attention, with 54 percent of respondents indicating plans for increased allocations to the asset class.  

“The venture side had a dramatic increase,” Eaton partner Peter Martenson said in a virtual press conference on Wednesday. “This is a migration you see in an economic cycle like this where tech is dominating, digital transformation is dominating, as well as the ability to find alpha from portfolio considerations.” 

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Martenson said the combined surge of interest in venture capital and growth equity is also a response to an increasingly crowded buyout market. When buyout funds are in high demand, investors turn to venture capital and growth equity to put capital to work and find alpha, Martenson said. 

“We have projects in the market that are in venture and growth, and we’re seeing that interest from a broader base of institutional investors who may normally not have gone into these,” Martenson said. “These venture-backed companies stay private for much longer than they did a decade ago, so if you want allocation to this transformation, the digital transformation, the place to get it is through venture and growth equity.” 

These sentiments are consistent with Preqin’s quarterly update on private equity and venture capital for the first quarter of 2021, which was released on Tuesday. Within venture capital, Preqin said aggregate deal value reached $126 billion in the first three months of 2021, defeating the prior quarterly record of $87 billion set in the second quarter of 2018 — a domination the report attributes to the reinvestment of high exit proceeds. 

Increased private market investments are also evident in private equity fundraising’s recovery from the Covid-19 pandemic, according to Preqin. The data firm found while the pandemic prompted investors to reassess allocations into private markets, fundraising has seemed to recover the past two quarters: In the first quarter of 2021, $188 billion was raised by private equity funds globally, a 16 percent increase from the same period last year.

“It appears fundraising has recovered to some extent in the past two quarters,” the report said. “That said, private equity fundraising has been declining since 2017, so a longer-term slowdown could be the prevailing trend.”

Among the limited partners surveyed by Eaton Partners, 58 percent reported that they have already identified fund managers they want to re-up with, but that they are still searching for other opportunities. Martenson said this trend is consistent with September 2020 attitudes. 

“That’s a lot less than we have seen over the last decade when sometimes it swings into the paradigm of people looking for new relationships,” Martenson said. “Now, it’s a bit of that ‘maintain your course, maintain that allocation with your fund managers and only add selectively’ attitude.’” 

Seventy-one percent of respondents also indicated that they have not changed the amount they allocate to first-time funds and emerging managers, according to the Eaton report. Firm partners attributed these results largely to restrictions on in-person meetings. 

“It’s still going to take a physical meeting at some point to probably convince or get most LPs to commit money to somebody,” said Jeff Eaton, partner and head of worldwide origination for Eaton. “When you’re being asked to write a $100 million commitment and your CIO asks you, ‘Have you ever met this manager? Looked him or her in the eye and shook their hand?’ and the answer is ‘No,’ I think it's still going to be tough for some CIOs to get comfortable with that.”

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