Are Investors Still Happy with Private Equity Performance?

Private Equity Investor Satisfaction Then and Now

Private equity had a record-breaking decade as the U.S. underwent its longest period of economic expansion in history, starting in 2009 and continuing into 2020. Private equity performance consistently eclipsed the public markets, and private equity investors contributed more capital than ever.

The 2019 Global Private Equity Report by Bain & Company revealed a year-after-year increase in deal value from 2014 to 2019, with high investor interest, excited equity markets, low-interest rates, and stable GDP growth in the U.S. and Europe as the driving forces. Then, the turmoil and uncertainty of 2020 rocked the markets, causing many PE firms to pivot their strategy.

Private markets strengthened after a brief stall in early 2020, resulting in an exceptional 2021, with investment activity surpassing the trillion-dollar mark, according to a 2022 S&P Global report.

But as the Fed raised interest rates repeatedly to combat inflation, private market deals plummeted in the second half of 2022. According to a McKinsey and Company report, 2022 was a record year for private equity activity and perhaps the second-best fundraising year ever. Still, global PE performance shrank for the first time since 2008. The decline in public market portfolios caused the denominator effect for many investors, and some began pulling back on future commitments to rebalance their portfolios.

S&P Global’s 2023 Private Equity Outlook Survey results found 27% of general partners felt that deal activity would deteriorate, citing market volatility and increased macroeconomic risks as top reasons.

With continuing global economic uncertainty, market volatility, and the PE-related deal activity slowdown, are private equity investors happy with their returns?

What Private Equity Investors Said Then

In 2016, Financial Poise published the results of a Preqin survey asking whether 2015 private equity performance had met investor expectations. At that time, 94% said their investments had met or exceeded their expectations, and more than half planned to contribute again in 2016.  Some investors expressed growing concern over management fees, unattractive terms, pricing, valuations, or transparency.

The 2019 Preqin survey saw similar results, with 93% of investors pleased with their investments’ performance. Investors were not concerned with portfolio performance despite worries that the growing rate of capital and dry powder would greatly outpace the number of deals. Competition was cited as one of the main challenges in private equity, as well as ultra-high valuations. Nearly 75% of investors said they’d commit funds again in 2020.

An Evolving Market

Since the beginning of the decade (and the 2016 survey), much has evolved in private equity, especially as experts keep an eye on economic downturns.

As private equity moved from the stall of early 2020 through the banner year of 2021 and the decline of late 2022, fund managers have had to do some creative adjusting in 2023 to generate value for investors – especially as talk of recession continues.

Bain & Company says that private equity’s sound foundation will see it through the worst of times, as “private market returns continue to outpace public returns over every time horizon” and “history suggests that clear sight lines – not ideal economic conditions – are what will bring the energy back to dealmaking.”

What Private Equity Investors Say Now

How are investors feeling as we move into the latter half of 2023? How did they feel about private equity performance in 2022, and what do they expect from the future?

According to a June 2023 Preqin survey, “investor sentiment toward private equity has stabilized … despite lingering concerns over the market environment and valuations.” About 85% of investors expect to commit at least as much capital this year as last year, up from about 77% in 2022.

Future Private Equity Performance Expectations

J.P. Morgan Private Bank sees reason to be opportunistic about the future of private equity funds, citing “fresh opportunities arising in private markets this year as volatility continues and valuations get more attractive.”

For new funds and emerging opportunities, Private Bank foresees strong relative returns over time for these compelling investments, pointing to history for the proof: “Managers that launch funds in periods of economic stress and market volatility tend to outperform.” However, the bank advises new investors to take a balanced and diversified approach regarding strategy, asset class, investment year, manager, and geography.

Many experts are looking optimistically toward the private equities secondary market to gain access to new portfolios. Ernst & Young points to the prediction that the secondary market may reach upwards of $500 billion within 10 years time.

While many PE investors hang in there, it doesn’t mean they’re not cautious about future private equity performance.

The Goldman Sachs Public Pension Quarterly Snapshot reported a continued decline in return assumptions for public pensions, with many public plans lowering their forecasts again for the fiscal year 2024. And yet, some systems, like the Ohio Public Employees Retirement System and the Massachusetts Pension Reserves Investment Management Board, have increased their allocation to private markets.

Despite continued uncertainty and risks presented by the overall economic environment, many experts remain positive about private equity in the coming year, with emerging opportunities, the large nest egg of dry powder, and PE valuations becoming more attractive.

In the meantime, general partners continue to navigate through imbalances, macroeconomic turbulence, rising costs, and short-term cash squeezes to strengthen the long-term outlook.

Many experts, including Pricewaterhouse Coopers, say investors can expect a focus on investments with sustainable development, such as digital and talent transformation and ESG (environmental, social, and governance) initiatives.

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[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can view at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

• Opportunity Amidst Crisis – Buying Distressed Assets, Clalims, and Securities for Fun & Profit
• Due Diligence Before Investing
• Earning Green by Investing Green

This is an updated version of an article originally published on March 17, 2016, and revised on February 7, 2020.]

©2023. DailyDAC^TM, LLC d/b/a/ Financial Poise^TM. This article is subject to the disclaimers found here.