Investors plan to put slightly more capital to work in private equity this year after commitments bottomed out in 2022. But don’t call it a comeback.
Rede Partners — a consultancy that advises private equity firms on primary fundraising, general-partner-led secondary transactions, and other projects — surveyed 149 limited partners this spring about their plans for capital earmarked for private equity funds. Among the investors surveyed, 26 percent of investors plan to decrease their capital deployment, 26 percent plan to increase it, and 48 percent said their deployment would remain unchanged.
The consultancy used the results to create its Rede Liquidity Index score, which rose nine points since last year to 50.
But although the RLI climbed this spring, sentiment toward private equity funds is still well below recent levels. The index, which has hovered around 65 in recent years, hit a record low of 41 in the second half of 2022.
“Our latest data indicates that fundraising momentum will remain muted,” the Rede Partners report explained. “Poor fundraising momentum will likely continue to persist for some time to come, largely spurred by low distribution expectations and flat valuations.”
Private equity was a darling of public pension fund and college endowment investment portfolios, but it’s now hampering returns. As investors maintain or shrink their allocations to the asset class, private equity executives have become worried about their ability to raise capital, according to their personal coaches.
With private equity funds returning less capital to investors in the current market environment, limited partners have less money to recycle into new commitments. Rede Partners expects capital deployment to private equity funds to remain relatively flat during the coming 12 months.
Investors that are continuing to invest more with private equity funds showed interest in specific areas.
Investors outside North America are interested in North American private equity funds and have expressed a strong appetite to put capital to work in those funds, according to Rede Partners. But institutional investors in North America are expected to decrease the capital deployed to private equity firms. Many larger U.S. public pension funds reported being at the top end, or above, their allocation targets, which is having a disproportionate impact on the fundraising market as a whole, Rede Partners said in their report.
Mid-market buyout funds were a favorite among investors surveyed. Forty-two percent said they intend to increase their exposure to lower mid-market buyout funds and 38 percent planned to allocate more capital to mid-market buyout funds over the next 12 months.
Inventors also favored funds focused on healthcare; 37 percent planned to increase their allocations. Impact and sustainability strategies were the second most in demand, with 27 percent of LPs planning to allocate more to those types of funds.
Demand for private equity secondaries has also increased, the Rede Partners report found.
“LP demand for classical secondary transactions has risen at the expense of GP-led transactions,” said Magnus Goodlad, partner and head of transactions at Rede Partners. “A spike in enthusiasm for purchasing secondary stakes in PE funds can be viewed as a signal that LPs believe we have reached the bottom and are expecting valuations and performance to pick up in the medium term.”
