Preqin has published its H2 2022 Investor Outlook report, which finds that allocations to hedge funds are likely to increase while higher risk venture capital and private equity allocations suffer.
The survey, conducted in June, interviewed more than 300 LPs investing in alternative assets. It breaks down global investor sentiment into several categories: ESG, private equity, venture capital, private debt, hedge funds, real estate, infrastructure, and natural resources.
Key points
• Only 30% of private equity and 26% of venture capital investors plan to increase their pace of capital deployment into the asset class in the next 12 months.
• 50% of private equity and 55% of venture capital survey respondents expect worse performance over the next 12 months.
• 55% of survey respondents believe we may be approaching the bottom of the current equity market cycle, but 63% expect a continued deterioration of the macroeconomic environment.
Economic concerns spook investors
Preqin’s report found that investors expect private equity and venture capital near-term performance to face the strongest headwinds, with 50% and 55% of survey respondents expecting worse performance over the next 12 months, respectively.
Venture capital valuations are of most concern, with 80% of investors viewing the asset class as overvalued.
As markets come under pressure, highest risk asset classes such as private equity and venture capital are expected to be affected most. The recent summer rally in stock markets may provide some relief, but it remains to be seen if it constitutes a structural change in direction.
Concerns over deteriorating economic conditions are counterbalanced by optimism that we are reaching a bottom low point in the equity market – 55% of survey respondents believe we are reaching this stage of the market cycle in equities.
Only 30% of private equity and 26% of venture capital investors plan to increase the pace of capital deployment in the next 12 months.
This represents, respectively, a 13 and 17 percentage point decline compared with the same survey last year.
By contrast, 24% and 13% of investors plan lower commitments of capital, with the remainder looking to maintain their current pace of investment. Investors are now firmly in risk-off mode.
According to the survey responses, allocations to hedge funds are likely to increase, while higher-risk venture capital and private equity allocations are likely to suffer.
In particular, macro, CTAs and relative value hedge funds are expected to attract more flows. This is consistent with Preqin's expectations of a softer fundraising environment for private equity and venture capital (PEVC) in the second half of the year.
Developed market allocations provide safe betting
The share of investors planning developed market allocations only was 52.8% for private debt, 40.8% for venture capital and 34.8% for private equity – a 15.2, 16.3 and 6.6 percentage point increase, respectively, compared with June 2021.
The strong dollar poses a significant risk to the global economy. Emerging market assets have traditionally suffered during times when the dollar is strong, in part due to the additional strain that dollar-denominated debt places on balance sheets.
Cameron Joyce, SVP, Deputy Head of Research Insights at Preqin, commented: “Our latest survey indicates a material shift in investor behaviour. The hangover from post-Covid-19 stimulus measures, combined with geopolitical events, has created the perfect storm for risk assets in 2022.
"In private markets, we have seen a relative shift in preferences towards real assets and away from higher risk private equity and venture capital investments.
"Fresh allocations to alternative assets are likely to continue in the current environment but at a slower pace. That said, more defensive asset classes such as hedge funds and private debt are expected to fair comparatively well.”
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