SEATTLE, Dec. 13, 2018 -- Private market strategies are expected to represent more than one-third of limited partner (LP) total portfolio allocation over the next 24 months, despite lowered return expectations for most fund strategies, according to a new survey conducted by PitchBook. Surveys gathered from more than 50 global LPs found the majority of respondents expect to increase average allocations to the asset class by 1.6% and have been satisfied with returns in recent years. At the same time, more than 30% of respondents claim to have lowered return expectations for buyout, growth, VC and real assets funds. Valuations and deal pricing were cited as the biggest strains on performance, followed by political uncertainty. PitchBook's survey went on to find mostly healthy relationships between LPs and GPs, yet management fees continued to be the biggest area of misalignment.
"Private markets make up the single biggest slice of LP asset allocations and are also the area expected to increase the most over the next two years," said James Gelfer, senior strategist at PitchBook. "This aggressive push is driven by a broader sea change of institutional investors reassessing how they build portfolios and compensate external managers, with a broad shift to passive public market investments while seeking alpha-generating strategies in private markets. As return expectations are falling for some private market strategies, we expect investors to continue exploring new areas of the market including private debt and secondaries funds."
The PitchBook LP Survey collected responses from more than 50 global LPs during 4Q 2018. In this survey, limited partners were defined as endowments/foundations, family offices, fund-of-funds, high-net-worth individuals and private pensions. Respondents AUMs ranged from less than $250 million to over $25 billion.
To download the full report and survey, click here.
Allocations & Access Points
- Private market strategies have enjoyed a broad-based increase in LP allocations and are expected to see the share of commitments continue to rise in the coming years, with the average allocation expected to grow from 30.9% to 32.5%.
- Direct investments and co-investments accounted for nearly 40% of the average allocation to private markets, demonstrating LPs' desire for more direct access to underlying deals.
- More than 40% of respondents anticipate the pace of capital calls for private debt funds to accelerate over the next 12 months, followed by secondary funds, which are already hovering at record levels.
- Despite efforts by some prominent LPs to consolidate GP relationships, more than one-third of LP respondents have more than 25 manager relationships and nearly half of them have seen their number of manager relationships increase over the last five years. Only 15.1% of LPs report a reduction.
- Institutional LPs are warming to first-time fund managers, as evidenced nearly 60% having committed to a first-time fund, including 46% as an anchor investor. Only 13.5% of respondents dismissed the prospect of investing in a first-time fund.
- When considering a fund commitment, performance and management fees were the most important factors; fees were also cited as one of the top areas of misalignment with GPs.
Returns & Performance
- To evaluate private market investment performance, LPs rely primarily on cash multiples (83%), followed by IRR (81%) and PME (48%).
- Despite long-term underperformance, respondents were most optimistic about long-term performance of VC funds, expecting an average IRR of 19.8%.
- As for other private market strategies, nearly one-third of respondents have lowered return expectations across buyout, growth and real asset strategies.
- Technological change ranked highest among factors predicted to positively impact private market performance over the next five years. On the flip side, valuations and deal pricing are expected to be the biggest drag on performance.
Download the full report here.
PitchBook is a financial data and software company that provides transparency into the capital markets to help professionals discover and execute opportunities with confidence and efficiency. PitchBook collects and analyzes detailed data on the entire venture capital, private equity and M&A landscape—including public and private companies, investors, funds, investments, exits and people. The company's data and analysis are available through the PitchBook Platform, industry news and in-depth reports. Founded in 2007, PitchBook has offices in Seattle, San Francisco, New York and London and serves more than 20,000 professionals around the world. In 2016, Morningstar acquired PitchBook, which now operates as an independent subsidiary.