Why private equity markets are maintaining long-term appeal

Private markets are continuing to generate long-term outperformance for investors. More than 70% of limited partners (LPs) say returns on their private equity portfolios have outpaced their public equity holdings over the past decade, according to Coller Capital’s 2022 Summer Global Private Equity Barometer report.

This has helped boost lifetime returns. The number of investors who have netted annual returns of more than 16% across the lifetime of their private equity holdings is at a near-record high of 42%, the report showed. The only time it has been higher was in 2007, when 45% reported lifetime returns in excess of 16%.

The report also showed that even if LPs’ funds for each vintage only achieved median performance, a majority would still hit their private equity return targets. This is highest in Asia Pacific, where 88% of LPs would meet their targets with only median performance, compared to 55% in North America.

Family offices increase exposure

These buoyant returns are attracting keen interest in private market assets from a broader array of investors. Family offices, for instance, have steadily increased their allocation to private equity over the past two years. According to UBS’s 2022 Global Family Office Report, their allocations rose to 80% this year from 75% in 2020.
Almost three-quarters of family offices (74%) said they are likely to increase their allocation to private equity over the next three to five years because they are attracted by its return potential. UBS data also shows that just over half (52%) said they are also likely to increase their private equity exposure to broaden their opportunity set beyond what is on offer in public markets. These opportunities are coming partly due to a fall in the number of initial public offerings as startups choose to stay private for longer. In the US, the number of private equity-backed companies has skyrocketed over the past two decades from 1,698 in 2000 to 8,892 in 2020.

Private debt still in demand

LPs are most confident about the prospects for private credit in North America and Europe, with just over half saying those regions will be more attractive over the next two years. By contrast, more than two-thirds (68%) say Asia Pacific will be less attractive.

Even so, a third of North American LPs are anticipating an uptick in defaults as central banks increase interest rates, compared to a quarter of LPs in Asia Pacific. European LPs are most optimistic, with only a fifth expecting higher default rates as a result of rising borrowing costs.

More broadly, Coller Capital’s data showed that half of LPs plan to increase their allocation to alternative assets over the next 12 months. Just under half (48%) intend to add to their exposure to infrastructure, while 42% plan to increase private equity allocations and 39% to private credit.
With public market volatility increasing amid surging inflation and higher interest rates, the appeal of private market assets remains clear.