LPs cautiously optimistic about private equity in 2020: survey

Institutional investors are placing strong bets on the North American market.

Institutional investors still see private equity as the asset class to pour their investments into, despite increased worries over political rhetoric against the industry, according to Eaton Partners’ latest survey.

“Institutional investors are approaching 2020 with cautious optimism,” a partner from Eaton Partners, Peter Martenson, said in the study. “Even though the outlook has brightened somewhat since our last survey, we still expect LPs to seek out recession-resistant strategies and uncorrelated cash flow streams given the late stage of the current economic cycle.”

Approximately 57 percent of LPs said they will allocate more capital to private equity in 2020, followed by real assets, private credit, which 12 percent of respondents said they would invest into, and hedge funds.

“It boils down to performance,” Martenson told Buyouts. “Private equity and buyouts, whether they’re medium to large and certainly small, have performed well for the fund managers.”

Most LPs, around 59 percent, think that North America will provide the strongest risk-adjusted returns this year, followed by Europe and Asia, which both tied at 20 percent, and Latin America’s 1 percent, according to the study.

Martenson said that LPs see North America as “a rewarding asset class to be in,” but that investors have seen several disappointments in Latin America, including political cultural and regulatory hurdles that have caused the industry to underperform in the region.

Recently, private equity has faced criticism from politicians who want the industry regulated. In July, Sen. Elizabeth Warren, one of the Democratic candidates for president, likened private equity firms to “vampires” that bleed companies dry.

According to the study, which surveyed 57 LPs, 61 percent of institutional investors are somewhat concerned about the political rhetoric, down from the 69 percent in Eaton’s last LP Pulse survey from October; 32 percent said they weren’t concerned; and 7 percent said they were very concerned.

Martenson said that LPs have taken the criticisms seriously and are making changes.

“Private equity has certainly tried listening to the feedback loop and adjusting to how they participate in capitalism, investing so it better fits with what the institutional investor base wants and needs out there,” he said.

Action Item: Check out Eaton’s latest survey here.