Evening Brief – 11.21.23
Hungry for PE Despite Lower Distributions
Despite a drop in payouts to Limited Partners (LPs), investors’ desire for private equity remains strong, according to data from Montana Capital Partners, a Swiss-based private equity secondaries investment manager focused on the middle market.
Approximately 84% of family offices and 41% of institutional investors continue to invest more than 10% of their portfolio in the asset class compared with 81% and 39%, respectively, in 2022.
Montana, which recently published its 11th Annual Investor Survey, “Private Equity in the Spotlight – How Leading Investors Navigate the Slowdown,” stated that the sustained rise was mostly driven by continued outperformance relative to other asset classes but cautioned that LPs were seeing a significant pause in capital distribution from private equity investments.
In 2023, nearly 66% of respondents reported they received lower-than-expected distributions, with 33% saying the impact was “significant.” This trend is likely to continue in 2024, with 44% of respondents expecting lower distributions than previously predicted.
“Not surprisingly, the need for liquidity jumped to the top of the list as among the key reasons to consider secondary sales of private equity commitments,” the firm noted.
“The slowdown of distributions presents a very attractive opportunity set for secondary buyers, and we are currently seeing a robust flow of both LP-led and GP-led transactions,” said Eduard Lemle, managing partner and CIO at Montana
Private equity performance has remained largely resilient, with 78% of investors reporting positive or flat performance in 2023 to date, bolstering the asset class’s attractiveness.
The number of investors expecting a decline in their overall private equity commitment in the next 12 months has increased, albeit from a low base (9% versus 3% in 2022), indicating that the private equity fundraising climate will remain problematic in 2024.
The survey found that middle-market buyout and secondaries, selected by 75% and 66% of investors, respectively, remained the top two strategies.
Approximately 85% of respondents intend to maintain, enhance, or introduce a secondary market allocation. The most popular transaction types are LP-led small and mid-market transactions (37%), followed by multi-asset GP-led transactions (24%).
Regarding sectors, investors continue to favor software and technology, healthcare, and business services, with 68%, 64%, and 45%, respectively, awarding the most appealing risk/reward profiles, up from 52%, 64%, and 44% in 2022.
The annual Investor Survey is based on an online poll of more than 90 family offices and institutional investors globally, with a subset of those questioned in-depth to provide further insights.