Montana Capital Partners (mcp) has published its ninth Annual Investor Survey, Finding Outperformance in Private Equity – How Leading Investors Actively Manage Their Portfolios. The results show that, for investors, private equity continues to be a highly sought-after asset class, whilst also highlighting some concerns that General Partners might be buying into companies at too high EBITDA multiples.
The report captures the views of some of the world’s leading investors in private equity and provides valuable insights into their investment strategy and preferences in the current market environment, characterized by strong deal activity, high valuations, and concerns over rising inflation.
In general, the appetite for private equity remains as strong as ever, with 35% of institutional investors and an impressive 88% of family offices and foundations reporting an allocation of more than 10% of their portfolio to the asset class. For both investor types, allocations have been gradually increasing over the past years, arguably as a key measure to increase portfolio returns and as a result of the relative outperformance of the asset class.
Secondaries remain one of the top-three long-term strategic preferences of investors — together with mid-market buyouts and growth capital. Nearly 60% of institutional investors now dedicate more than 5% of their private equity allocation to the strategy. Family offices and foundations have also increased their allocation, with 39% of them now allocating over 15% of their private equity portfolio to secondaries.
Elevated valuation levels, on the other hand, is the dominant theme which keeps investors awake at night. Seventy-two percent of respondents stated that GPs buying into companies at too high EBITDA multiples is their top concern regarding market activity over the next 12 to 24 months, followed by the fear of a slowdown of economic recovery and political and regulatory uncertainty with 15% and 10%, respectively.
When it comes to managing private equity allocations, investors increasingly take an active role, instead of solely relying on their existing GPs to find the right opportunities for them. The survey found two in every three investors to investigate industries and sectors that are expected to benefit in a post-COVID-19 environment as a way to improve the risk-return profile of their portfolio.
Marco Wulff, managing partner at mcp, commented: “Private equity’s appeal to investors continues to be very high, and secondaries play an important role for many of them. This is due to the benefits that secondaries offer to investors, for instance the attractive risk-return profile, as well as the level of innovation and resilience that the strategy has shown in the current market environment.”
Christian Diller, managing partner at mcp, added: “The governance model of private equity has worked very well during the pandemic with significant distribution and exit activity. Even if high valuation multiples and the current rise in inflation rates are a concern for investors, private equity is expected to continue outperforming public markets thanks to the significant growth and operational improvements in underlying portfolio companies that GPs can bring.”
Eduard Lemle, partner at mcp, added that “It is interesting to see that investors appear determined to more actively manage their portfolios, recognising that some sectors have been performing better than others. We would expect this trend to also be reflected in the secondaries market in the future, with increasing demand for more specialised, sector-focused funds.”