PE breaks records in fundraisings, but returns may be disappointing

INSTITUTIONS and wealthy private investors have been enamoured of private equity since the 2008 financial crisis, as rock-bottom interest rates spurred a search for alternative assets that could outperform, with a low correlation to traditional public markets.

Since the start of the financial cycle in 2009, some US$5.8 trillion has flowed into PE, as Bain & Company's Global Private Equity Report for 2019 points out. This abundance of capital has raised competition for assets. As at 2018, the amount of dry powder or uninvested capital is estimated by Preqin at a record US$2 trillion. So far, returns have been rewarding. Bain's research cites Cambridge Associates, which has found that buyout funds have outperformed public markets across various investment horizons and regions, even though returns have moderated as horizons lengthened.

The big question, however, is how long the party will last. The usual suspects of a slowing global economy, rising financing costs, the continuing uncertainty of Brexit and the overhang of US-China trade tensions could conspire to upend the trajectory of both public and private markets. Asia in particular may already suffer some whiplash. While the Asia-Pacific PE industry scaled a new high in 2018 - it now accounts for 26 per cent of the global PE market from only 9 per cent a decade ago - Asia Pacific-focused fundraising dropped by more than 50 per cent to US$75 billion.