Private Equity Tides Are Changing

Private equity investment is steady, but investors are changing how they approach the sector. PREQIN reports that, based on a recent survey of private equity investors, fundraising remains strong, though the sectors receiving the inflows are changing.

According to Private Equity Intelligence, Ltd (PREQIN), private equity investors are still interested in increasing their allocations to the private equity asset class over the next two years. A substantial 71 percent of respondents are considering this route, which is virtually unchanged from 72 percent in 2007. Only 3 percent are thinking about reducing allocations to private equity, compared to 5 percent last year. On average, respondents have put 7.9 percent of their total assets into the private equity sector, leaving a 2.3 percent gap between target and actual allocation. This is considerably wider than 2007’s 1.9 percent gap. The reasons for the continued strength of private equity—in terms of capital inflows—are difficult to ascertain. PREQIN cites the historical double-digit returns delivered by the asset class. As this would translate to market out-performance, it is easy to see why investors would continue to increase allocations. In addition to shaping investor behavior, the credit crisis has also influcenced the types of funds to which private equity investors are committing their capital. Those focused on debt investments have seen spieks in fundraising. Mezzanine funds led the pack with a 98 percent increase in funds raised for the first half of 2007 compared to the same period in 2008. Distressed debt funds also appear to be popular right now, experiencing capital inflow growth of 58 percent year over year. Buyout funds, the largest private equity sector, have attracted less capital so far this year than in 2007. Capital raised for the first half of this year is 18 percent lower than for the same period last year. Venture capital is unchanged, and real estate inflows are up a model 4 percent. Investors may be eager for a recovery, but for now, they will have to watch and wait. While it seems as though the private equity sector has survived the credit crunch, only time will tell when—or if—a recovery will occur.