Will Competition in Private Markets Lead to Return Compression?

June 10th, 2019

by Cameron Nicol, Senior Marketing Manager – eVestment Private Markets

When asked to indicate their level of concern about the impact of a range of factors on the private markets industry, investor and manager respondents both voiced their highest level of concern about competition for deals in the 2019 eVestment Private Markets Due Diligence Survey.

Competition for Deals Tops List of Investor and Fund Manager Concerns

Forty-one percent of investors indicated they were very concerned about competition for deals and 25% of fund managers indicated similarly (figure 1). Only 3% of investors and 16% of fund managers expressed no concern.

Competition for deals was only rated the fourth highest concern in our 2018 survey, but topped this year’s list. This rise in concern could suggest that investors and managers are beginning 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. With competition inflating valuations, a rush by managers to put capital to work has potential to compress future returns.

Figure 1: How concerned are you about the impact of… “Competition for Deals”

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Given their level of concern, investors’ due diligence may start to include an increased focus on managers’ deal sourcing processes and their ability to deploy capital.

Investors Show Concern Over Valuations, Yet Fund Managers’ Perspectives Differ

Understandably given the focus on competition for deals, private company valuations was another key concern in this year’s survey. 38% of investors indicated they were very concerned, ranking it second on their list. Fund managers attributed less concern to this area, raking it seventh on this year’s list with 36% of respondents indicating they had no concern over company valuations. The fund manager respondents may feel confident in being disciplined in deploying capital and generating returns, even with rapidly increasing purchase price multiples.

Investors Forecast Lower Returns for Private Markets

In general, respondents expected the performance of most strategies to decline. Specifically of note is that over half of investors (figure 2) and 30% of fund managers expect private equity returns to decline.

Expectations for private debt were more mixed, while investors were on balance viewing both real assets and infrastructure positively. The view on expected performance of real estate was consistent across fund managers and investors with over 40% of each predicting a decline in future performance.

Figure 2: Investors’ Future Return Expectations

Dig Deeper

Read about how the increased competition for deals is affecting decision making and what other concerns are top-of-mind for fund managers and investors in our 2019 Private Markets Due Diligence Survey Report.

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