Back to School: 86 pct of LPs alarmed by high prices as PE sentiment falls

  • Percentage of LPs with positive perception of PE falls to 58 pct
  • Investors express caution as multiples hit pre-crisis peak
  • Even so, dry powder, fundraising continue to skyrocket

More than eight of 10 investors are worried about soaring prices private equity firms are paying for new assets, according to a mid-year survey published by data provider Preqin.

Despite providing massive amounts of dry powder to the private equity industry over the previous three years, fund investors are growing increasingly concerned about pricing. Some 86 percent of them cited valuations as a key concern in coming months, according to the survey. (See chart.)

Private Equity LP Views on Key Challenges Faced Over the Next Year
Key Challenge H2 2017 H2 2016 H2 2015 H2 2014 H2 2013
Pricing/Valuations 86% 67% 65%
Deal Flow 51% 31% 48%
Exit Environment 41% 56% 37% 20%
Fees 38% 37% 47% 26% 23%
Performance 32% 42% 39% 19% 31%
Regulation 16% 20% 34% 30% 31%
Debt Financing 11% 12%
Volatility/Uncertainty 11% 44% 24% 9% 30%
Transparency 10% 8% 36% 22% 24%
Liquidity 31% 14% 18%
Source: Preqin

Last year, just 67 percent of the LPs Preqin polled considered pricing and valuations a key challenge, a slight uptick from the 65 percent who said those dynamics posed a challenge in mid-2015.

Major U.S. LPs like State of Wisconsin Investment Board have been directing commitments to the lower end of the buyout market, where purchase-price multiples — calculated as a multiple of a company’s earnings before interest, taxes, depreciation and amortization — tend to be lower.

PPMs “remain at historically high levels with large buyouts trading at levels seen in 2007,” between 10x and 11x EBITDA, Wisconsin staff wrote in a recent presentation. Meanwhile, PE firms are closing smaller buyouts for prices of 8x to 9x EBITDA.

Perhaps because of the pricey environment, the percentage of investors who have a positive perception of the industry fell to 58 percent as of June from 84 percent at year-end, Preqin found.

Just 35 percent of the LPs plan to commit more to PE funds in the next 12 months than in the previous 12 months. During that period, global dry powder swelled to $918 billion from $818 billion as of mid-2016.

Some LPs have opted to expand their programs despite the challenges posed by the PE market. According to Buyouts data, U.S. PE fundraising surged 67 percent to $85 billion in Q2, thanks in large part to megafunds raised by firms like Apollo Global Management and Silver Lake.

More recently, New Mexico State Investment Council is moving forward with a plan to commit roughly $600 million to the asset class next year in an effort to increase its allocation to 12 percent from 8 percent. Orange County Employees’ Retirement System, which increased its target allocation to 8 percent this year, will invest $450 million to $550 million in new PE funds over the next year.

Action Item: For more information about Preqin, visit