The amount of unspent capital in private equity funds is piling up but so far investors remain generally positive about the sector, figures show.

There is an increasing amount of uncommitted money – or “dry powder” – waiting to be put to work by private equity funds, according to figures up to the middle of this year, showing a total of $965 billion of uncalled capital, a situation that is reducing fund-raising activity, figures show.

Figures from Preqin, which tracks alternative investments such as private equity and hedge funds, said that because of the large amounts of unspent capital, investor activity has slowed, but attitudes towards private equity remain positive. From Preqin’s database of private equity managers, some 87 per cent of investors say their investments have matched, or beaten, expectations in the past year.

As a measure of a generally positive stance, only 11 per cent of 100 institutional investors surveyed indicated they are looking to invest less capital in private equity compared to 12 months before, the smallest proportion across all asset classes, Preqin said in a report.

Some 9 per cent of private equity investors want to cut the number of general partner relationships they maintain in their portfolio over the next two years, compared with 14 per cent taking this view six months ago. This outcome will be welcome news to fund managers, Preqin said, because the statistic suggests that the wider limited partner community isn’t retreating from the sector, as was the case with the giant California pension fund CalPERS, which has been reported to be actively looking to cut its number of GP relationships.

In terms of fund types, the majority of limited partners still see small to mid-market buyouts as offering the best opportunities in private equity, with 50 per cent of respondents looking to invest in this fund type in 2015. 

Some 23 per cent of private equity investors see venture capital funds as presenting the best opportunities, followed by distressed private equity and mezzanine funds, which were viewed as presenting the best opportunities by 17 per cent and 14 per cent of private equity investors respectively. 

First-time fund managers continue to be at a disadvantage when looking to secure capital, with 51 per cent of LPs indicating that they would not commit to a debut fund managed by a new GP. Slightly fewer than half of LPs (47 per cent) said they deem the length of a GP’s track record as the most important factor to take into account when deciding whether to commit to a fund, highlighting that experience remains vital to a GP’s fundraising success.

Performance
The report found that more than a third (35 per cent) of respondents stated that their private equity fund investments beat their expectations in the last year, which is a substantial increase on previous years. In recent times, the proportion of investors that had their expectations surpassed for their private equity portfolios has been declining, falling from 18 per cent in June 2013 to 12 per cent in June 2014. The proportion of LPs that felt their investments in the asset class had fallen short of expectations has remained relatively constant at 13 per cent.

However, there is some notable disparity in satisfaction with returns between regions. According to Preqin’s survey, half of investors based in Europe had their expectations exceeded by the performance of their private equity fund investments over the past year. But with 19 per cent of Europe-based investors reporting that their private equity portfolio had fallen short of expectations, the region has the largest proportion of dissatisfied LPs.

Between 2013 and 2014, a notable period for bull market conditions with significant stock market highs, there was a decrease in the proportion of investors that expected their private equity portfolios to beat the public market by more than 2 per cent, the report continued. 

In June 2015, despite public market indices nearing record highs, the largest proportion of investors (49 per cent) have indicated they expect their private equity investments to exceed public market returns by more than 4 per cent. This would be driven by the apparent success of respondents’ private equity investments in the last 12 months.

Preqin compiled a league table of consistent performers, using only the funds for which it has performance data and has assigned a quartile ranking. (However, 2013, 2014 and 2015 vintage funds have been excluded as these funds are too early in their fund lives to generate a meaningful internal rate of return.) 

Some six buyout managers achieved the best possible score of 1.00: Inflexion, Vista Equity Partners, Harvest Partners, Odyssey Investment Partners, Altor and DFW Capital. In the venture capital space, nine VC fund managers clocked up the top score of 1.00: Pittsford Ventures Management, Sequoia Capital, Benchmark Capital, OrbiMed Advisors, General Catalyst Partners, Union Square Ventures, Spark Capital, Pontifax and Atomoico. In the mezzanine space, no fund managers achieved the best average score of 1.00 in 2015, but three achieved a score of 1.33: IFE Mezzanine, MezzVest and Bond Capital. 

In real estate, three real estate fund managers achieved the best score of 1.00: Carmel Partners, Centennial Holdings and Embarcadero Capital Partners. As far as infrastructure is concerned, the most consistent performing infrastructure fund manager in 2015 is Harbert Management Corporation with an average quartile ranking score of 1.75.