Introduction
A recent survey, by Adams Street Partners uncovered a growing sense of positivity among Limited Partners (LPs) about the success of markets. LPs believe that private markets are likely to perform than public markets over time, leading them to consider boosting their investments in alternative assets. Factors contributing to this optimism include expected decreases in interest rates and the ability of markets to withstand economic disruptions. Current trends in investments suggest a shift towards opportunities in technology and healthcare industries with an interest in markets indicating a desire for more diverse investment portfolios. These findings shed light on the changing landscape of equity and LPs efforts to develop strategies, for sustainable growth.
Private Markets Poised for Long-Term Success: Survey Reveals Optimistic Outlook and Investment Trends
Based on a study most investors known as Limited Partners (LPs) are optimistic, about the success of private markets. They anticipate that private markets will perform better than markets in the run. This growing confidence is reflected in their plans to boost the allocation of alternative assets within private markets.
The survey carried out by Adams Street Partners, targeted pension funds, institutions, and portfolio managers across the US, Europe, and APAC regions. The finding reveals that 90% of partecipants believe that private markets will outperform public markets in 2024. Two-thirds of them plan to increase their investments in this sector.
Others contributes to this optimistic view of private markets are given by the expectations of interest rate cuts, a revival of the IPO market, and the ability of private markets to withstand macroeconomic shocks.
While anticipations of interest rate cuts and other macroeconomic news remain significant challenges for private markets, and in particular for 39% of private market investors, it represents a decrease from the 55% reported in previous years. According to Jeff Diehl, Managing Partner at Adams Street Partners, private equity investors can no longer solely rely on favorable macroeconomic factors.
The survey results says that 40% of the interviewed believe that the major investment opportunities in private markets in 2024 will involve technology and healthcare. The market’s ability to adapt to changes and technological transformations, such as Artificial Intelligence, has contributed to the optimistic outlook for private markets throughout 2024 and beyond.
The survey also indicates strong investor interest in secondary markets, with about 88% of respondents stating their intention to allocate 20% of their private market investments to this sub-asset class over the next 5 years.
Long-term funds are no longer seen as the sole means of protecting against perceived risks, as the survey reveals that 55% of respondents consider investing in managers with multiple growth strategies as the most crucial factor for portfolio resilience.
The report concludes by highlighting the increase in Limited Partners in private markets, confirming a trend that has been ongoing for years. In particular, alternative allocations within pension funds have almost doubled over the last 20 years.
Challenges and Alternatives in Private Equity Performance Measurement: A Critical Analysis
In the world of private equity, the measures used to gauge investors’ returns are often not very clear and evident. In particular nowadays, the most commonly used measure is the IRR, or Internal Rate of Return. However, this measure has often been criticized because it is easily manipulable, and investors struggle to compare their returns with those from more transparent investments such as stocks or bonds.
According to a Bloomberg report, the distribution of money by private equity firms to their investors decreased by almost half between 2012 and 2023. Specifically, in the first 9 months of 2023, payouts from global private equity funds amounted to $166 billion (excluding venture capital), whereas in 2021 for the same period, the figure was $357 billion.
Therefore, investors, lacking a clear measure to express their gains or losses, are not well-informed about the performance of the funds in which they have invested. An alternative to IRR is gaining traction, namely DPI, the ratio of distributed to paid-in capital, a clearer measure that is not subject to manipulations. However, this measure also has weaknesses; it does not provide information regarding unrealized investments still in the fund, and dividends can be financed by borrowing from portfolio companies or the fund itself against the value of a private equity portfolio.
IRR results offer insights into how the fund performs over the years, but it is not entirely reliable due to varying investment timings and exits. Additional measures such as “multiple of money invested” and “public markets equivalent” exist, but they also have significant limitations. A solution found by investors is to use multiple metrics to evaluate investments in private capital funds. However, even in that case, the performance results remain unclear until the entire capital is paid out.
Investor Confidence and Expansion Strategies in Private Equity Markets
Avista was founded in 2005 and has invested approximately $8 billion in the global healthcare sector so far. Specifically, the company focuses its resources on six healthcare sectors that it believes benefit from “strong tailwinds”: outsourced pharma and medtech services, consumer healthcare, medical devices, specialty & generic pharmaceuticals, distribution and diagnostics, and healthcare technology.
On March 1, 2024, Avista announced the closing of its dedicated healthcare fund, surpassing its target with a total amount of $1.5 billion. The business aims to invest this money in up and coming ventures, within the healthcare sector focusing on middle market product and technology companies. The fund is funded jointly by a broad range of investors including public funds held in registered retirement accounts, university endowments, foundations, family offices, insurance companies, and professional investment firms.
Consequently, the Avista case above serves as relevant example to people looking for opportunities to invest in private markets.
Coller Capital, unlike many other earlier firms in the private equity arena, is now launching a new fund to add to their expanding portfolio. This fund, named the Coller Secondaries Private Equity Opportunities Fund (C-SPEF), will commence its life with a first injection coming from Coller and the other institutional investors to the tune of USD 300 million. Therefore, the fund is a liquid fund that presents purchasers with a monthly subscription fee and a buyback of up to 5% of the net asset value of the company that takes place every quarter. The pool of the fund can be accessed only by forming an investment of at least $5,000.
This is another proof that the funds that invest in private assets are getting investors that are normally outside of the pension plan funds.
Conclusion
In conclusion, the survey findings suggest a robust outlook for private markets, with LPs demonstrating confidence in their long-term performance potential. The anticipated increase in allocations to alternative assets reflects a strategic shift in investment priorities amid changing market dynamics. As LPs navigate uncertainties and seek avenues for growth, the private equity landscape continues to evolve, driven by innovation and resilience.
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