Can the recent strength of PE continue to deliver for alt investors?

Sentiment remains high among alternative investment professionals according to new stats

Can the recent strength of PE continue to deliver for alt investors?
Steve Randall

Private equity (PE) has seen some record-breaking performance in the last year but are the good times coming to an end?

Not according to alternative investment professionals who remain bullish on the performance of PE over the next 12 months despite challenges including the Chinese government’s recent crackdowns.

Global consulting firm EisnerAmpner says that more than half of respondents (51%) to its recent survey expect private equity to see the largest increase in investment allocations among limited partners (LPs), far above those that cited venture capital (27%) or hedge funds (22%).

PE is also seen as the industry most primed for ESG investment in the next three years, but alts professionals view the lack of standardized reporting and data sets (48%) as the biggest barrier, followed by sourcing quality investment opportunities (20%) and dispelling the notion of poor returns (17%).

Despite the crackdowns on various business sectors, notably tech, China is still seen as a key market for investment with 92% of PE and venture capital (VC) professionals maintaining their strategies for China, while just 3% of hedge fund professionals expect the crackdowns to be the factor with the biggest impact on fund investments in the coming 12 months.

The sentiment on China tallies with the views of Regina Chi, vice president and portfolio manager at AGF Investments, who said recently that Beijing’s stance could open up new opportunities for investors.

Best sectors and strategies?

Where are alternative investment professionals focussing their investment intentions?

Technology remains dominant for the rest of 2021 with half of all respondents choosing this, ahead of healthcare/life sciences (39%), and infrastructure (23%) which saw a significant jump from last year (9%).

“Despite the lingering effects of the COVID-19 pandemic, a new administration and ongoing geopolitical events, 2021 was a very good year for alternative investment managers,” said Peter Cogan, managing partner of EisnerAmper’s Financial Services Industry. “The survey revealed that investors are adapting their strategies to take advantage of these micro-and macro-economic trends to generate alpha.”

The survey asked private markets investors which strategies they thought LPs will increase allocations to in the next 12 months.

Growth equity and impact were the most popular with 37% and 31% respectively.

For hedge funds, long/short and global macro strategies continue to be their bread and butter, but one third of respondents expect LPs to increase investment allocation to event-driven in the next 12 months, followed by credit (25%) and quant (17%). 

Escalating regulatory scrutiny and compliance obligations (30%) followed by increases in capital gains tax rates (27%) are seen as the biggest challenges.

On artificial intelligence and machine learning for investments or trades, 85% of hedge fund professionals said they did not currently use these tools and just 17% have an ESG portfolio.

“There was a resurgence of investor interest in hedge funds this year propelled by global growth, fiscal stimulus and low interest rates,” said Cogan. “We’re continuing to see investors deploy more capital to the asset class to diversify their portfolios and generate returns.”

Hiring intentions

Asked about hiring intentions for the next year, 45% of PE and VC firms increase their investment teams, a large rise from the 27% who said so in 2020; 31% expect to hire for their operations teams.

Outsourcing has also grown in popularity within the private markets with 61% of firms already outsourcing back-office/middle-office functions or planning to do so in the next 12 months.

These strong intentions do not dismiss the challenges that respondents are facing, especially increases in capital gains tax rates and escalating regulatory scrutiny/compliance obligations. 

PE and VC have had a strong year on the dealmaking front, and we expect this trend to continue as LPs are keen to invest and investment teams are looking to hire,” said Cogan. “There are certainly challenges ahead when it comes to taxes and regulations, and we’re seeing firms address this by outsourcing some of their back- and middle-office functions to service provider experts while they focus on their portfolios and LPs.”