Investors are showing renewed optimism in private equity and credit markets, as recent surveys indicate a shift towards larger allocations. After a challenging period for fundraising, the sentiment among limited partners (LPs) is shifting positively, with many looking to increase their investments in these asset classes.
Key Takeaways
70% of institutional investors are currently investing in private markets.
52% of institutional investors plan to increase allocations to private equity.
Private debt and renewable infrastructure equity are also gaining traction.
The demand for private markets remains strong despite recent fundraising challenges.
Optimism Among Investors
According to Schroders’ latest global investor insight survey, optimism is returning among LPs after a couple of years marked by stagnant fundraising and limited exits. Ingo Heinen, global head of business development at Schroders Capital, noted that investors are eager to make allocations again and are looking to write larger checks.
The survey revealed that:
70% of institutional investors globally are currently engaged in private markets.
25% of those not currently investing plan to do so within the next two years.
Growing Interest in Private Equity
The survey found that 52% of institutional investors and gatekeepers expect to increase their allocations to private equity. Other asset classes, such as private debt (45%) and renewable infrastructure equity (42%), are also seeing increased interest.
This aligns with findings from Goldman Sachs, which indicated that while many LPs are overallocated to private equity, they remain underweight in private markets overall. Investors are actively seeking new access points, including co-investments and secondaries.
The Search for Yield
Despite the positive sentiment, recent fundraising numbers have been tepid. Heinen explained that investors are still drawn to private markets due to a persistent search for yield and income, even as interest rates have risen significantly in recent years.
The U.S. Federal Funds rate has increased from near zero to between 5.25% and 5.5% since early 2022, although it recently fell to a range of 4.75% to 5%. This environment has led many investors to seek ways to future-proof their portfolios amid global economic uncertainties.
Valuations and Market Dynamics
Interestingly, private equity valuations have not declined as much as many anticipated. Heinen pointed out that while public market multiples have fluctuated, private equity valuations have remained relatively stable. This stability is attributed to the growth potential of the companies involved, which continue to show positive EBITDA and revenue outlooks.
Long-Term Commitment to Private Markets
Market experts suggest that LPs are maintaining their commitment to private markets despite the current demand downturn. Jayne Bok, Asia head of investments at Willis Towers Watson, emphasized that private equity and private debt are fundamentally long-term asset classes.
Investors may be waiting for more favorable market conditions before committing new capital, especially given high interest rates. Some are also in the process of de-risking their portfolios by shifting towards more liquid or passive strategies.
Rising Inflows from Private Wealth Clients
In addition to institutional investors, private wealth clients are also increasing their allocations to private markets. Currently, around 85% of allocations to private markets come from institutional investors, but there is a growing belief that private clients will allocate more in the future.
Fund managers are responding by providing easier access to illiquid assets through long-term asset funds (LTAFs), which have gained traction since their approval in the UK last year. Schroders Capital recently launched its third LTAF, focusing on UK venture capital, reflecting this trend.
In summary, the landscape for private equity and credit is evolving, with investors increasingly looking to make larger allocations despite recent challenges in fundraising. The long-term outlook remains positive as both institutional and private wealth clients seek to navigate the complexities of the current market environment.
Sources
Investors eyeing 'bigger tickets' in private equity and credit, Buyouts.