One in four investors planning to increase private capital allocations: Preqin

DESPITE looming concerns over private asset classes’ ability to outperform over the next 12 months, global investors are increasingly targeting private allocations across portfolios to hedge against ongoing uncertainty, said Preqin. 

In its Investor Outlook: Alternative Assets, H2 2023 released on Tuesday (Aug 22), the London-based investment data platform surveyed 178 institutional investors across the globe and found that 26 per cent of those intend to increase their allocations in private assets. 

In contrast, only 5 per cent of the respondents plan to sell down their private capital allocations. 

Private equity set to grow despite weaker performance

Out of the private asset types, private equity continued to be the most held, with 63 per cent allocating to this class. 

Private equity is expected to gain more capital in the next 12 months, with over a third of respondents (34 per cent) planning to allocate more capital to this asset type within that time frame. 

Of these respondents, more than half (55 per cent) are targeting capital deployment in Q3, while 84 per cent expect to do so by the end of 2023. 

“This is despite over half (53 per cent) of investors surveyed believing private equity to be ‘overvalued’ currently, and a quarter expecting performance to be worse in the year ahead than the previous 12 months,” said Preqin. 

However, the number of respondents looking to increase private equity allocations in the long term has declined, signalling a softening in long-term appetite. 

Venture capital expects limited funding flow

Preqin expects there to be limited funding flowing towards venture capital. Around 67 per cent of the investors surveyed reported that their portfolio pricing had decreased over the last 12 months, while 68 per cent viewed their portfolio to be overvalued.

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As a result, 76 per cent of respondents plan to commit less than US$50 million into venture capital in the next 12 months.

Private debt continues to shine

Investors remain bullish on private debt. Around 90 per cent believe the sector met or exceeded their expectations over the past year, and over half (53 per cent) expect it to perform better in the next 12 months. 

About 45 per cent of the respondents intend to increase allocations to private debt over the next 12 months – the highest proportion among all asset classes. 

Interest in private debt is primarily driven by the uncertain economic environment and concerns regarding interest rates, which have led investors to seek reliable income. 

Infrastructure remains popular despite uncertainty

Preqin found infrastructure to be the second-most popular asset class, with 41 per cent of investors polled expecting to allocate more capital in the next 12 months, despite uncertainty surrounding the asset class. 

The high interest gain in core infrastructure funds – one of the most popular infrastructure fund strategies – is a result of high inflation. Rising interest rates also pose challenges to infrastructure fund returns over the next 12 months, stated the investors. 

Confidence grows as macroeconomic cycle nears end

On investor sentiment, Preqin found signs of improving confidence. More than three-quarters (81 per cent) of those surveyed believe that the market is currently on a decline or approaching the bottom of the macroeconomic and real estate market cycle. 

However, a much smaller group of 26 per cent think public equity markets are already starting to recover.

Among investors in the real estate asset class, 66 per cent of respondents suggest the market is overvalued and expect a correction, a slightly higher percentage than the previous year. 

Returns in the real estate market are further challenged by interest rate hikes and asset valuations. Around 47 per cent of respondents think their real estate portfolio will perform worse in the next 12 months, up from 41 per cent in June last year. 

The number of respondents expecting to pare their allocation to real estate has doubled to 16 per cent compared with the previous year, based on the report. 

“Investors are striking a cautious tone as they await more certainty from the global economic picture,” said Cameron Joyce, senior vice-president and head of private equity, research insights, Preqin. 

“As confidence starts to grow that we are approaching or have already hit the bottom of the market, investors look set to continue to deploy capital to private assets throughout Q3 2023 and Q4 2023. Equity markets tend to be a lead indicator of investor sentiment, so if optimism continues to grow, we could see greater activation of capital deployed over the coming years.”