Allocators Think PE Will Offer the Best Returns Despite Valuation Controversy

The ongoing debate over valuations hasn’t disrupted institutional investors’ confidence in private equity.

Seventy percent of institutional investors believe private equity will provide the highest absolute returns of all assets over the next 12 months, according to Commonfund’s annual market sentiment survey that is expected to be published on Wednesday. About half of the investors who were surveyed expected the highest returns to come from private real assets and private credit over the next year.

“As people look in the rear mirror and they saw private equity not being marked down as fast as public markets, they look at that as a natural buffer,” Mark Anson, CEO and chief investment officer of Commonfund, told Institutional Investor in an interview. But he thinks investors are right to believe that private funds will outperform. A previous Commonfund study has shown that private equity funds have an average illiquidity premium of 3.5 percentage points, even after taking into account the valuation lag, he added. The premium is what investors earn over stocks, which can be sold at any time.

“Those years that follow that downturn tend to be great years for investing in private capital,” Anson said. “Why? Because valuations come down, companies become cash strapped and are looking for other sources of capital to help them get through that period.” He added that allocators who are experiencing the denominator effect – meaning those who are overweight private equity as their public portfolios shrink – should still try to keep investing in PE because 2023 could end up being a great vintage year.