LPs expect big performance from private equity, even amid macro concerns

Optimism on PE reigns after successful 2021, but several factors could soften valuations.

A majority of private equity limited partners believe the asset class will deliver the best returns over the next year, well above the forecasts for other strategies, according to a fresh survey from Commonfund.

The survey comes off the back of results recently released from several state pension funds that showed strong returns in private equity. Those results have been tempered by some investment officers who expect softer returns as a result of various headwinds like inflation, supply chain disruptions and geopolitical instability.

Florida State Board of Administration in late March reported a 56.6 percent annual return on its private equity holdings. Kansas Public Employee Retirement System earned a 50.3 percent return in 2021. State of Wisconsin Investment Board returned 47.5 percent.

“Over long periods of time, we’ve seen private equity and venture capital outperform public equities. And in the most recent few months, we’ve seen that happen by dramatic amounts,” said Commonfund Capital president and chief executive Peter Burns in an interview about the results of the survey, which received responses from 150 investors.

Finishing behind private equity in the survey were private real assets at 41 percent, venture capital at 37 percent, public equities at 29 percent, private credit at 19 percent, and cryptocurrencies at 10 percent.

The biggest prevailing threats to the economy were inflation and geopolitical tensions headlined by the Russian invasion of Ukraine, according to the survey.

“We don’t think inflation is going to end soon. It feeds on itself. To date, we have not seen much of a squeeze on margins, even with price increases and increased labor costs. We’ve talked again and again and again with different executives and PE firms about labor shortages,” Burns said.

Concerns about volatility in public tech stocks have also caused jitters about valuations.

“We expect to see some softness in that area of the portfolio. However, we do think the private piece will hold up somewhat. It appears to be a mixed bag, but we do expect performance to pull back a bit based on what public markets are doing,” said John Bradley, a senior investment officer at Florida SBA said during its last investment committee meeting.

However, Burns said he thinks mature technologies that are beyond early financing rounds will retain strong valuations in the coming months. As an example, he cited companies that develop human resources-focused software that manage everything from hiring processes to tracking expenses.

Update: This story was updated to reflect Peter Burns’ title with Commonfund Capital.