Institutional investors are confident in future private equity performance but are concerned about anti-private equity sentiments by U.S. presidential candidates, geopolitical events and a possible economic downturn, according to a survey from global placement agency Eaton Partners.
Eaton Partners, which surveyed 62 LPs for its survey, found that 63 percent of institutional investors said they are somewhat concerned about a “war” on private equity, but that they’re unclear on potential action. Six percent of respondents said they’re very concerned and 31 percent feel that it’s “all political rhetoric” and are not concerned, according to Eaton’s LP Pulse Survey published on Oct. 17.
“There’s a feeling that private equity is the epitome of capitalism,” said Peter Martenson, partner at Eaton Partners. He added that investors are concerned about falling returns if private equity continues to be criticized.
Presidential hopeful Sen. Elizabeth Warren recently went after the industry. In a Medium post from July, she likened PE firms to vampires “bleeding the company dry and walking away enriched even as the company succumbs.”
Warren co-wrote the Stop Wall Street Looting Act of 2019, which would increase taxes on carried interest and limit private equity managers’ ability to write off interest payments on the debt used to acquire companies, Buyouts previously reported.
LPs also expressed worry over geopolitical events such as Brexit.
Around 44 percent of respondents said they would invest less in the U.K., a notable increase from the 27 percent from July’s survey. About 42 percent of respondents said Brexit has “no immediate impact” on their investment activity, down from July’s 48 percent. Six percent said they would increase their investments in the U.K., up from 4 percent in July.
“There was a lack of clarity on how Brexit would occur,” Martenson told Buyouts. “Given the lack of conversation and messaging about Brexit, people are stepping back from investing into the United Kingdom and finding opportunities elsewhere that provide more comfort and certainty.”
Institutional investors aren’t too worried about the trade war between the U.S. and China, with 61 percent of LPs saying it had no immediate impact on their investments in China, down from 69 percent who felt similarly in July.
Fifty percent of LPs believe a recession is about a year away, 45 percent believe that growth has slowed down but that the economy is doing well and 5 percent believe an economic downturn is imminent and the economy has “deteriorated noticeably,” according to the survey.
“Our latest survey clearly shows investors are expecting increased headwinds from several directions as we close out the year,” Jeff Eaton, partner at Eaton Partners, said in a press release. “Now more than ever, it is vital for general partners and fund managers to clearly articulate their investment visions and strategies with a view towards the projected macroeconomic environment, as we expect LPs to become even more selective and disciplined when allocating investment dollars to the private capital markets.”
Action Item: Check out Eaton’s survey here.