Global private equity assets pass the $4tn milestone

The industry’s assets under management could reach $5tn by the end of 2022, says data provider Preqin

Private equity firms are now managing more money than ever before. The strong fundraising and rising returns have helped push the industry’s assets under management over the $4.1tn mark last year, according to data provider Preqin.

“Private equity’s enormous expansion seems to be accelerating. The industry is on course to add almost a trillion dollars a year for the next five years, an astonishing rate of growth,” says Christopher Beales, executive editor of Preqin’s 2020 Global Private Equity and Venture Capital report.

The asset class has been benefiting in part from widespread anticipation of a market downturn among both fund managers and investors. The rapid growth puts the asset class on course to reach $5tn in AUM by the end of 2022, according to the report.

“Investor demand has been strong and sustained, and fund managers have been able to offer them robust returns even in a low-interest environment, fuelling a virtuous cycle of growth,” Beales said.

Average fund size grew 35% in 2019 to $1.6bn, and the average time spent in market decreased to 13 months, the lowest level ever seen.

But not everything has been positive for the industry. Market conditions are becoming increasingly more challenging, with the influx of investable capital and intensifying competition driving up asset prices. According to Beales, the industry is fundamentally strong, but “2020’s waters will be tricky to navigate”.

Fundraising surpassed $500bn for the fourth consecutive year in 2019, with 1,316 funds closed, which has meant that it has become more difficult for managers to stand out, and for investors to find the right funds for them. There are more than 18,000 fund managers currently offering a private equity product, up from 16,400 in 2018.

Nearly 45% of fund managers experienced more competition in private equity transactions, a survey conducted by Preqin showed. All this has had a dampening effect on deal flow. In 2019, the value of all private equity-backed buyout deals fell 21% to $389bn year-on-year.

Despite a tougher environment for the industry investor appetite is not waning. Preqin’s survey showed that 86% of buyout investors said they plan to invest more or the same level of capital in 2020 compared with 2019.

Similarly, 65% of investors believe that equity markets are currently at a peak, and 33% are increasing their allocation to private capital as a result. One reason is that most investors are satisfied with how their private equity portfolios are performing. In fact, 87% of LPs surveyed by Preqin said that returns in 2019 had either met or exceeded their expectations.

However, maintaining the kinds of returns that investors have come to expect from the asset class is going to be difficult going forward.

“This will test the mettle of the best performers. Investors will be watching closely to determine which firms are able to flourish in bad times as well as good”, Preqin noted.

Source: Financial News

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