Private capital party, interrupted

These are not great times for private capital, with bombed-out public markets forcing even the most supine venture capitalist and private equity baron to take at least some portfolio markdowns. But they’re not exactly terrible times either.

Preqin’s just-released bi-annual report on the alternative investment industry shows why. While most of the firms Preqin polled think we are only at the beginning stages of a difficult economic environment, investor appetite for alts “remains incredibly strong” — and especially for private capital.

The data firm forecasts that the private capital industry’s overall assets under management will almost double from $9.3tn at the end of 2021 to $18.3tn by the end of 2027.

The big engines will continue to be private equity and venture capital, Preqin predicts.

Preqin also expects the private debt and real estate investment industries to grow at a solid clip (while hedge funds will be a drag on the overall alternatives space).

The overall 11.9 per cent compounded growth rate forecast is slower than the nearly 15 per cent seen over the past half-decade private capital boom. And there is going to be a lot of pain over the next year or so.

The lack of public marks will mask a lot of it, but there has clearly been a lot of silliness going on in recent years, and some funds will post nasty results as a combination of more sober marks and a more elongated investment cycle. Growth equity looks particularly dicey.

But frankly, from conversations with investors over the past year we think Preqin’s bullishness may be right.

Even in a higher-rate world, the combination of at least plausibly decent-to-great return expectations and the artificial smoothness of mark-to-make-believe accounting is an addictive combination for many pension plans, endowments, sovereign wealth funds and insurers.

More reading:

A Minsky moment for venture capital?