Private equity investors were mostly pleasantly surprised by how this asset class performed last year. But with lots of uncommitted capital around, valuations may now be unattractive for putting fresh money to work.

The results of putting money into private equity have been far above what investors expected, according to a survey carried out by research firm Preqin for 2015. And the report says that just over half of investors (51 per cent) expect to make fresh commitments to the sector in the first half of this year, raising concerns about asset valuations when there is $696 billion of “dry powder” capital waiting to be put to work.

Some 30 per cent of investors polled by the firm said investments beat their expectations over the past year, up from 17 per cent who took this view in December 2014. Only 6 per cent of surveyed investors reported that their investments had fallen short. 

A record $475 billion was distributed from private equity funds in 2014, and a further $189 billion was returned to investors in the first six months of 2015. 

“This [distribution] means many investors will need to reinvest more capital to maintain their allocations to the asset class,” the firm said.

The data suggests that after a recent period of robust returns, it may prove a struggle to repeat those gains if valuations remain relatively stretched – although recent stock market falls may open up opportunities, industry figures have told this publication. 

Money and valuations
The amount of money available to go into private equity “has raised concerns over the valuation of assets”, Preqin said, noting that 70 per cent of surveyed investors said valuations were the biggest challenge facing them in 2016. This was echoed by 40 per cent of surveyed fund managers, while 38 per cent say that it is already more difficult to find attractive investment opportunities now compared to a year ago.

Among other figures, the report said the total size of the private capital industry reached $4.2 trillion as of June 2015, up from $4.0 trillion in December 2014. Private equity fund strategies accounted for $2.4 trillion of this total. 

A majority of investors (71 per cent) cited North America as offering the best opportunities in 2016, up from 60 per cent a year ago. Within emerging markets, Asia, China and India were all seen as favourable by over 40 per cent of private equity investors.