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Asset Allocation

LPs stay bullish on PE

In a survey of 500 institutional investors, 64% of respondents said they remain optimistic about PE’s performance.

Despite industry headwinds, limited partners are still bullish on private equity.

In a survey of 500 institutional investors who manage a combined total of $23.3 trillion in assets, 64% of respondents said they remain optimistic about PE’s performance and 66% said they still believe there is a significant contrast in risk and return levels between public and private markets.

The 2024 Natixis Institutional Outlook Survey signaled continued faith in the asset class as it weathers an uncertain interest rate environment that has staunched deal flow and hindered fundraising. Capital raising across seven private market strategies fell 27.4% year-over-year as of Q3, according to PitchBook’s Q3 2023 Global Private Market Fundraising Report.

Still, LPs tended to re-up with their PE managers this year in lieu of allocating to venture capital, a product of concerns over exaggerated valuations in the latter asset class. As a result, PE occupied a greater portion of the overall private capital pie compared to last year.

As of September, PE fundraising comprised 46.3% of all private capital raised, a nearly 9 percentage point increase from 2022’s full-year total; VC’s share, on the other hand, fell from 21.1% last year to 14.8% of all private fundraising dollars this year, according to PitchBook data.

“The consensus is that there’s still a significant difference in returns between public and private markets,” said Dave Goodsell, executive director at Natixis Investment Managers. "[LPs] are counting on that.”

PE funds have beat stock market returns over the past three decades, generating an average excess annual return of about 4.3% compared to public equities from the years 1981 to 2021, according to a KKR whitepaper.

What’s more, from 2016 to today, PE, VC, fund-of-funds and secondaries strategies have outperformed the S&P 500 index—even despite recent declines in private markets, according to PitchBook data.

The survey included responses from decision-makers at public and private pension plans, insurers, foundations, endowments and sovereign wealth funds.

 

LPs also said they see private investment opportunities in data centers and housing, including senior living and affordable and student housing, the survey said.

In addition to PE, institutional investors are bullish on private debt, with 60% of respondents logging a positive outlook on the space. In fact, seven private debt funds closed at over $1 billion this year, from firms including Ares Management and Brookfield.

Above all, LPs remain wary of elevated interest rates and inflation as the top risks to their portfolios, and they’re split about when rates will come down. Forty percent of respondents said they expect rates to remain higher for longer while another 40% said they expect rate cuts in 2024.

Over half of respondents said they are actively de-risking their portfolios moving into the new year.

Featured image by Matt Polski/Getty Images

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