May 23, 2019, Atlanta – Private markets funds have continued to rake in new commitments from institutional investors eager to diversify their portfolios and capture the returns private markets investments can offer. However, investors are now tempering their private markets return expectations. Coupled with other industry trends, this will have implications for private markets fundraising and due diligence according to a new eVestment report, produced in association with parent company Nasdaq.
The 2019 eVestment Private Markets Due Diligence Survey of institutional investors, consultants and private markets fund managers finds that 52% of investors expect returns in the space to decline in the future (page 16). Only 12% of investors expected private equity returns to increase, with the balance – 36% – expecting returns to stay about the same.
Forty-seven percent of investors surveyed expect to see lower returns in venture capital vs. just 16% of investors who expect returns to increase. And in real estate, 41% of investors expect to see lower returns vs. 14% who expect returns to increase.
Another interesting point from the report is the apparent mismatch between fund managers’ desire to find new investors and investors’ desire to reduce or keep stable the number of fund managers with which they work (page 18). In the survey, three out of four fund managers indicated they plan to increase their investor base, while three out of four investors indicated they actually plan to maintain or decrease the number of fund managers with which they work.
“Due diligence remains the foundation for investors looking to build a quality portfolio and generate above market returns,” said Graeme Faulds, Director of Product – Private Markets at eVestment. “With the majority of survey respondents’ outlook for returns to be flat at best, and a desire from investors to consolidate manager relationships, due diligence processes are only going to become more critical for both sides of the table. The need for fund managers and investors to embrace better data and technology to help them navigate this reality has never been more important.”
A few other interesting points from the 2019 report include:
- Managers underestimate the level of importance of analytics investors are using to evaluate them. For example, when considering quantitative due diligence, 68% of investors rated loss ratios as very or extremely important, while only 32% of fund managers rated loss ratios similarly (page 22).
- Forty-one percent of investors indicated they were very or extremely concerned with competition for deals, while only 25% of fund managers responded that they were very or extremely concerned about competition for deals (page 7).
- Thirty-eight percent of investors responded that they were very or extremely concerned about private company valuations while only 23% of fund managers said they were very or extremely concerned about valuations (page 7).
- The probability of a market correction was a top three concern for both fund managers and investors with close to two thirds of the view it was likely to occur within the next two years. (page 8).
- ESG has been a hot topic for several years but use of ESG in evaluating private markets fund managers is not very important to most investors and consultants. Only 16% of investors and consultants surveyed said ESG at the firm level was very important in their evaluation of private markets managers and only 6% said it was very important at the underlying deal level. (page 28).
The survey of institutional investors, consultants and private markets fund managers was conducted in early 2019. Investors and consultants responding to the survey represent more than $765 billion in assets under management/assets under administration (AUM/AUA) and aggregated private markets AUM/AUA of more than $131 billion. Private markets fund managers responding to the survey manage more than $600 billion.
To download a full copy of the report, please click here.
eVestment, a Nasdaq company, provides institutional investment data, analytics and market intelligence covering public and private markets. Asset managers and general partners reach the institutional marketplace through our platform, while institutional investors and consultants rely on eVestment for manager due diligence, selection and monitoring. eVestment brings transparency and efficiency to the global institutional market, equipping managers, investors and consultants to make data-driven decisions, deploy their resources more productively and ultimately realize better outcomes.
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