The recent tide of capital flows into private equity looks set to continue, EY says
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Big private equity firms have attracted record fund inflows in recent years and that trend is expected to continue for the medium term, EY says.
It’s one of the takeaways from the accounting and consulting firm’s 13th annual Global Alternative Fund Survey, which is based on interviews with more than 200 hedge funds and private equity firms along with more than 60 institutional investors.
Within the alternative investment space, the survey highlights trends in capital flows towards hedge funds, private equity, real estate and other grouped asset classes such as private credit.
And speaking with Stockhead, Antoinette Elias — sector leader for EY’s Oceania wealth and asset management division — said the latest survey revealed a clear trend towards PE.
“Within the space, both hedge funds and private equity are viewed as alternatives to traditional managed investment strategies such as a long only equities fund,” she said.
She said a consistent shift towards investments classed as alternatives has been underway for a number of years, as capital seeks out higher returns in a broader investment environment of steady growth.
“But within the alternate space, if you ask is it going into hedge funds or private equity — what the survey found is that although money flowing into alternatives, it’s moving more rapidly into the private equity bucket rather than hedge funds,” Elias said.
Of the institutional investors surveyed, hedge funds remained the highest allocation at 33 per cent, followed by PE at 25 per cent. But the 2019 trend was the bigger story, as hedge fund allocations fell from 40 per cent while PE investment rose by the same amount, from 18 per cent.
Real estate investments picked up from 20 per cent to 23 per cent, while exposure to other alternative asset classes edged lower.
“What’s the reason for the difference? I think what we’re seeing is the returns PE has been able to deliver are quite attractive,” Elias said.
“What also differentiates PE from hedge funds is that generally private equity investments are bigger and they’re made over a longer time period.
“So it’s a different investment style — capital is locked up and the majority of returns come at the exit point when assets are listed or sold.”
“So investors aren’t looking for quick returns. The model of PE is that management goes in and applies their PE model to a business, and the ones that do it well have delivered very strong returns and that’s why its an area big investors will continue to allocate funds to.”
And looking ahead, the survey indicated that the evident shift which took place in 2019 is here to stay.
“Whereas minimal volatility, consistently rising equity markets and low interest rates have challenged hedge fund managers’ returns, these market conditions have served as rocket fuel for private equity portfolios,” EY said.
“Investors do not expect this trend to change over the next two to three years, having reported that they anticipate their allocation to private equity and real estate products to continue to grow.”