For the third year in a row, Commonfund Capital conducted a year-end annual survey of institutional investors to gauge their sentiment about private market investments. Survey responses totaled 267 investors and consultants, representing 430 organizations and $427 billion in total assets. Following is a summary of the results and implications.
Investors’ top concerns were in three areas:
Prices are getting frothy (the valuation uptick of purchase price multiples being paid in some sectors);
The overall direction of industry fees and terms; and
Growth of the industry’s fund sizes (the overall increase in the fund sizes from one fund to the next).
We share these concerns, which help to inform our investment point-of-view and portfolio positioning. We have observed better pricing in the smaller end of the market, and, as a result, our private equity portfolios have a distinct tilt toward small and medium sized-funds that are focused on smaller companies.
Other headline concerns noted by investors included difficulty in finding and accessing top funds, global tensions and upcoming elections.
Investors again ranked U.S. private equity (small and medium-sized buyout funds) first in terms of performance potential. Investors indicated that they continue to see more robust return potential when working with sector specialists versus generalists and when general partners take a more hands-on approach with their portfolio companies. We agree — and we observe this theme across buyout strategies, venture capital and real assets and sustainability.
Following first-ranked U.S. private equity (small and medium-sized funds), investors rated the performance potential for venture capital, co-investments and private capital in emerging markets as strategies with higher return potential.
The year-over-year survey data reflected an overall increase (a continuing trend) in planned allocations to private market strategies. The leading strategies, where investors reported planned allocations would be trending up the most, were to small and medium-sized funds in U.S. private equity (led by sector specialist buyout funds, followed by generalist funds). These were followed by venture capital, co-investments, and secondaries.
Many investors also indicated allocation interest in ESG (Environmental, Social and Governance) and impact strategies, particularly environmental sustainability-themed sectors.
In looking more closely at the upward trend in allocations, we observed four, interrelated characteristics:
A growing number of organizations that have recently adjusted upward their target ranges for private capital strategies, as well as investors that are actively in the process of building toward their target allocation ranges;
An increased understanding of the need to dollar-cost average over time and not to try to time markets;
A distinct and growing interest in finding and accessing sector specialists with more modest fund sizes that target small and medium-sized companies; and
The number of investors seeking more attractive returns in the private markets as opposed to the public markets this cycle. It is the point of view of many investors that more active management may contribute not only to returns this cycle but may also serve as a risk management factor to more passive elements of their total portfolio.