Coller Capital’s latest biannual private market barometer shows that sentiment towards alternative assets is looking robust. Around 31% of 110 global private capital investors polled managing US$2.1 trillion of total assets expect to increase their target alternative asset allocation over the next 12 months, while 59% expect to remain at current levels. Some 45% are looking to raise allocation to private credit, 33% to infrastructure, and 31% to private equity.
“These findings are a huge vote of confidence for alternative assets,” according to Jeremy Coller, chief investment officer and managing partner of Coller Capital, adding that limited partners “stand ready to not just maintain their allocations but to actively increase them as they seek attractive, long-term risk adjusted returns”.
But there are caveats. For one thing, private equity is no longer the most attractive asset class. For another, the track record figures quoted for the asset class, with 62% saying their private equity portfolio has generated 11%-15% annual net returns since they began investing, are skewed towards the cheap money and low interest rate era of the past decade. Underlying market conditions have shifted dramatically and for once, past performance really may not guarantee future results.
The barometer also notes that 48% of investors have what they regard as ‘zombie funds’ in their portfolios, with general partners managing out existing portfolios while unable to raise new funds. And 54% of investors that don’t have such funds expect some of their current holdings to become zombie funds later in the cycle.
In other words, around three-quarters have, or anticipate having, exposure to private equity funds that are going nowhere.
Additionally, 64% expect some of their current general partner funds to either acquire or be acquired by other funds in the next two years, and 79% don’t anticipate this to result in a better outcome for their limited partners.
Scott Kleinman, co-president of Apollo Global Management, recently warned that “everything is not going to be okay” in private equity, and that the asset class is going to experience “a pretty dry spell” while it readjusted to the new environment of higher interest rates.
Private equity is not going away. But I have maintained for a long time that the asset class has overextended itself in a fashion that will require a pullback and revised expectations of returns, and is due a major reset. I still remain to be persuaded otherwise.
