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Laxman Pai, Opalesque Asia: Investors on the hunt for yield continued to commit capital to private equity in 2019, boosting total fundraising to $595bn, according to a study.
Preqin Investor Outlook AlternativeAssets H1 2020 said that 2019 was the third year in a row that the amount secured by private equity funds surpassed $500bn.
A key factor underpinning robust fundraising is investor satisfaction with the performance of the asset class: 87% of investors told us that their private equity investments met or exceeded their return expectations in 2019.
Indeed, top-quartile funds of vintages 2015 and 2016 are delivering net IRRs of 23.0% and 25.9% respectively.
Among private capital funds of vintages, 2007-2016 private equity outperformed all others with a median net return of 14.9%. And some investors expect private equity returns to improve even further.
Over a fifth (21%) of surveyed investors expect their private equity portfolios to perform better in the next 12 months, up from 17% in 2018 and 15% in 2017.
Rising asset valuations is investors' key concern
But 2020 will not be without its challenges. "In each of the past five years, our surveys have revealed rising asset valuations as investors' key concern for return generation, and market competition is intensifying - competition for assets is the second most cited challenge for return generation in 2020," said Preqin.
In a market characterized by high prices for assets, fund managers will be looking to prove their ability to source attractive opportunities.
Fund managers are not the only ones concerned about valuations - investors are as well.
Sixty-four percent of those surveyed feel portfolio company pricing is higher than it was 12 months ago. And given their perception that assets are overvalued, 36% are expecting a price correction in 2020.
Investors noted several other key challenges for return generation. A third of investors cited rising interest rates as a concern back in 2019, while only 10% said the same of 2020.
Twenty-three percent were worried about the impact of stock market volatility on return generation in 2019, but just 18% said the same of 2020.
Equity market cycle is at its peak
"A significant majority (61%) of alternatives investors believe the equity market cycle is at its peak, the same percentage as in our November 2018 survey," said Preqin.
Even so, amid high asset prices and concerns about a weakening economy, private equity investors are keeping faith with the asset class.
Over the next 12 months, 86% of private equity investors intend to commit at least the same amount of capital to the asset class as they did in the past year.
What's more, 95% are planning to maintain or increase their long-term allocations to the asset class.
Secondaries and fund of funds vehicles have attracted greater investor interest, with 33% and 17% of investors respectively believing they present the best opportunities, up from 23% and 8% a year prior.
And following recent years, investors still favor small to mid-market buyout funds; 60% feel they present the best opportunities in 2020, up from 54% in 2018.
Although private equity investors appear committed for the long term, emerging markets are less present in their plans - at least for the next 12 months.
The proportion of investors that plan to target only developed markets in the coming year has increased from 37% in 2018 to 47% in 2019, and the share of respondents solely targeting emerging markets has declined from 5% to 2% in the same period.
Among private equity investors that are targeting emerging markets, 50% and 44% think Southeast Asia and China respectively offer the best opportunities.
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