Lowered Private Markets Return Expectations Point to a Shift in Investors’ Fund Due Diligence

May 23rd, 2019

by Cameron Nicol, Senior Marketing Manager – eVestment Private Markets

Private markets investment strategies have continued to rake in new investments in recent years from institutional investors eager to diversify their portfolios and capture the returns private markets investments can offer. However, the 2019 eVestment Private Markets Due Diligence Survey has uncovered that institutional investors are now tempering their expectations for the asset class’ returns.

Our annual report, this year produced in association with Nasdaq, is the only industry survey specifically focused on uncovering the emerging factors, perspectives and best practices influencing the due diligence process to help both sides of the table better navigate this critical juncture.

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One of the key findings this year was forty percent of LPs expect a decline in performance for private markets strategies. When investigated by sub-asset class, the weight of opinion was against private equity, venture capital and real estate. Real assets and infrastructure were strategies that investors were most bullish on.

Combined with other concerns and perspectives on a range of topics uncovered by the survey, this points to a shift in investors’ approach to evaluating and selecting funds for private markets allocations, and consequently how fund managers should approach their investor relations and fundraising.

Competition for deals is the number one concern for both investors and fund managers.

Investor and manager respondents both voiced their highest level of concern about competition for deals, with investors indicating a stronger level of concern. This topic was only rated the fourth highest concern in our 2018 survey, but climbed to top this year’s survey — potentially as investors and managers begin to realize the effect of record fundraising levels flooding the market with available capital and an ever-growing list of fund managers chasing the same assets.

Close to two-thirds of investors and fund managers expect a market correction within the next two years.

The prospect of a market correction was a top three concern for both investors and fund managers, and the majority of both groups reported it would be within the next two years. While investors indicated this would lead to an increased focus on monitoring their portfolio, fund managers saw the biggest impact on the timing of exits.

Fund managers underestimate the importance of metrics and analytics during due diligence.

In terms of specific elements of the due diligence process, it was clear that fund managers underestimate the importance investors place on key pieces of analysis such as loss ratios, PME and the impact of fees. A new element uncovered this year was the growing importance of calculating horizon-based returns — perhaps in an effort to better assess private market performance alongside other asset classes as allocations grow in size and the strategy.

Now in its fourth year, our full findings report highlights a number of key perspectives that are set to have significant implications for investors and managers alike.

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