Private Equity Fundraising Expected to Slow in 2019

Preqin report says high pricing is putting pressure on future returns.

The private equity boom of recent years is expected to slow in the coming months, according to information and data provider Preqin. Nevertheless, the firm says the asset class will continue to remain a core part of investors’ portfolios.

Preqin said in a report that while private equity fundraising has exceeded $400 billion a year annually over the past five years, high pricing is putting pressure on future returns, causing distributions to slow, which has led some managers to lower their expectations for targeted returns.

“2019 looks like it might mark the end of the unprecedented boom in fundraising we’ve seen in the past few years,” Christopher Elvin, Preqin’s head of private equity, said in a release. “The flood of capital and participants that have entered the industry have put pressure on pricing, and this has a knock-on effect on future returns that we may already be seeing emerge.”

Elvin also said that with many investors concerned about a potential market correction, as well as liquidity reducing, they are likely to “exercise caution in terms of where and with which firms they deploy their capital.”

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news.

The report said that both the fundraising and deals marketplaces are “more crowded than ever before,” which presents a significant challenge for fund managers who don’t have an established track record.

Kevin Gruber, managing director of Germany-based analytics provider AssetMetrix said in the report that investors are increasingly allocating funds to North America, Europe, and developed countries within the Asia-Pacific region. He said that “diversifying geographically allows investors to hedge against potentially uncertain economic environments.”

Gruber also said a lot of investors are active in buyout, venture capital, and distressed debt, as well as infrastructure assets within their private equity allocation. He said combining risk/return profiles and asset diversification can help de-risk portfolios.

Some of the trends cited in the report include:

  • 72% of investors and 62% of fund managers cited high asset pricing as a key concern in 2019, making it the biggest issue cited by both groups.
  • The industry faces unprecedented levels of competition, as a record 3,749 private equity funds are in the market at the start of 2019, collectively seeking $972 billion, which is an all-time high.
  • In the 10 years to June 2018, the private equity industry has outperformed the S&P 500 index, returning 10.8% compared to 10.2% for the public market index. Additionally, 92% of investors report that their private equity investments have met or exceeded their expectations in the past 12 months.

Related Stories:

Why Long-Vilified Private Equity Does So Well

Asian Private Equity Funds Make Up 25% of Global Assets

CalPERS CIO Meng Says Pension Plan Must Expand Private Equity

Tags: , ,

Rhode Island Makes a Sustainability Deal with Archer Daniels Midland

Treasurer Magaziner pulls ESG proxy proposal.

Rhode Island Treasurer Seth Magaziner has reached an agreement with agriculture processor Archer Daniels Midland over its greenhouse gas emissions.

The crop producer will now examine the feasibility of adopting quantitative, company-wide policies for cutting the pollutants and expanding its renewable energy.

“Pension funds are long-term investors,” said Magaziner. “Companies, especially those as large as Archer Daniels Midland, must have a plan to adapt their business model to reduce dependence on fossil fuels. A transition to renewable energy can help stabilize and reduce energy costs—freeing up corporate resources that can be invested for sustainable growth.”

Archer Daniels Midland will now publish a report on the cost of greenhouse gas reductions by the end of Q1 2020, which will be publicly available.

Want the latest institutional investment industry
news and insights? Sign up for CIO newsletters.

“We regularly engage with companies with whom we invest in order to advocate for practices that we believe are in the long-term interest of our shareholders,” Evan England, the state Treasury’s communications director, told CIO. “Particularly that’s around areas where long-term sustainability can be called into question by certain practices.” These include environmental concerns, board diversity (racial and gender), and executive compensation issues.

According to the Treasury, boosting renewable energy use helps companies with price volatility while also prepping them for carbon reduction regulations and energy efficiency standards such as the Paris Agreement. Pension funds such as the California’s two mega-institutions, CalPERS and CalSTRS, and New York City’s five retirement plans, are tremendous advocates of environmental, social and governance (ESG) initiatives, which enhance the sustainability moves for the businesses they are vested in.

“This is a company where we knew that they had a reputation for integrating environmental sustainability in their business practices but they didn’t actually have a company-wide goal for increasing their use of renewable energy,” said England, regarding Archer Daniels

Magaziner had filed a shareholder proxy last year urging companies it invested in to advance sustainability practices and adopt more responsible proxy voting policies. Toward the end of 2018, the Treasury had pushed a proposal urging Archer Daniels shareholders to demand better ESG decisions. After Archer Daniels approved of the idea, Magaziner withdrew the suggestion.

The Treasury handles the investment decisions of Rhode Island’s $8 billion local and state government worker pension plans and currently holds about 121,000 shares of Archer Daniels Midland, according to England. The Treasury will continue to work with Archer Daniels regarding its policy changes.

 Archer Daniels Midland could not be reached for comment.

Related Stories:

Rhode Island Retirement to Lead Class Action Lawsuit against Google

Treasurers Demand Zuckerberg Quit as Facebook Chairman

Rhode Island Pension Returns 1.51% in July, 7.8% for Year

Tags: , , , ,

«