Back to School: LPs sift through record number of funds in market

  • Nearly 2,800 private capital funds in the market
  • Preqin survey of 490 LPs reveals challenges from plethora of alternative funds
  • Fund selection process described as increasingly daunting

A record 2,798 private-capital funds are in fundraising mode, making it  harder to select places to invest, a Preqin survey of more than 490 institutional LPs shows.

“It is undoubtedly a challenging time for investors,” Mark O’Hare, Preqin CEO, said in the research firm’s Investor Outlook for the rest of 2016. “An increasingly congested market [is] making it difficult to select the right investment manager or vehicle, while fund managers face a battle in standing out from the crowd and attracting fresh investor capital.”

Compared with 12 months ago, 47 percent of LPs said finding attractive opportunities in PE is harder while 6 percent said it’s easier.

In a positive for GPs, 89 percent of LPs said their PE portfolios have met or exceeded their expectations. Fifty-nine percent of LPs plan to invest in the second half and 43 percent said they would commit more capital in the next 12 months than they did in the previous 12 months.

“Avid investor demand for the asset class, as well as private equity’s proven track record during times of economic downturn, means” fundraising for the rest of the year should be “robust,” the study said.

PE fared well among the study’s six alternative-fund types: PE, hedge funds, real estate, infrastructure, private debt and natural resources.

Fifty-six percent of LPs plan to increase their allocations to private equity, while 7 percent plan to reduce. The only fund type to generate more interest was private debt funds, where 67 percent planned to lift their allocations while 17 percent planned to reduce.

In a first for the study, only 17 percent plan to boost their allocations to hedge funds, while 33 percent plan to reduce them.

“The hedge-fund sector may be at something of a watershed,” the survey said. “There have been signs of investors losing patience with hedge funds and this result, along with outflows from hedge funds … may indicate a significant number have lost faith with the asset class. However, if fund managers can respond to demand for better terms and build upon the improved performance which started in March 2016, then the value of these funds … may be reaffirmed to investors.”

Among investors, 21 percent currently hold no alternative funds; 16 percent have invested in one, 15 percent in two and 18 percent in three funds. Only 7 percent of institutional investors hold interests in six funds, the study said.

Action Item:  Read the Preqin study:

Correction: This story had been updated to replace an incorrect first name for Preqin CEO Mark O’Hare.

Alex Scandurra, CEO of Sydney fintech hub Stone & Chalk, talks in front of a drawing board located in the company’s offices in central Sydney, Australia, on April 26, 2016. Photo courtesy Reuters/David Gray