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PE Panorama: Sitting pretty

By Paul Mackintosh   
September 30, 2019

The press release for data provider Preqin’s investor update for alternative assets for the second half of 2019 is headlined “Investors Plan to Increase Their Commitments to Private Equity in the Year Ahead”. That ought to reassure any general partner (GP) or research group executive, or columnist who depends on the asset class for their livelihood. On the surface, everything’s looking rosy and the asset class couldn’t be doing better. Perhaps...

Preqin is usually the go-to for industry figures, so it’s interesting to see that industry assets under management stood at US$9.5 trillion across the entire alternatives spectrum, including private debt, infrastructure, hedge funds, real estate, and resources. Private equity, though, is the indisputable leader of the pack, according to Preqin, which states that “private equity funds have consistently produced impressive double-digit returns over the short and long term”.

It’s not surprising that Preqin’s poll of alternatives investors in June 2019 shows that private equity investors are by far the most satisfied. Only 7% of respondents said the asset class fell short of their expectations over the past 12 months, while 32% said it exceeded expectations. Compare that to natural resources, for instance, where 37% of investors said the asset class had failed to meet expectations.

So it’s hardly surprising that more than three-quarters expect the strong private equity performance to continue over the next 12 months even though just as many respondents are concerned about high asset valuations. Some 40% are planning to commit more to the asset class than they did over the preceding 12 months.

In a volatile and chaotic world, is it all so sunny in the walled garden of private equity? Pardon me for being a little jaded. As one private equity source from my dim and distant past observed, many large institutional investors, especially the more traditional ones, give the alternatives brief to younger and more impressionable team members, while the older and wiser investment committee heads take care of the traditional markets.

These naive young things, who may only be responsible for about one-tenth or less of the whole portfolio, are then faced with teams of sleek, highly motivated, extremely experienced and savvy GPs, who proceed to run rings round them. It’s all too easy in such situations for the limited partner to be bedazzled by the private equity funds’ impressive interim internal rate of return figures, and not look too closely at the actual realisations and portfolio company performance.

A caricature of the private equity investment process? Surely. And yet, I still suspect that private equity is one of the asset classes whose performance is easiest to misrepresent. That’s one definition of private, after all: that you are spared the merciless scrutiny of public markets analysts.

GPs often claim that the absence of such unrelenting and grinding scrutiny is the reason they can realise outsize returns. They may be right, but not in the way they want us to think.