Private equity investors worried about valuations [Private Equity Insights]

Venture capital and private equity investors are becoming concerned over the exit environment, and the majority believe the asset class is overvalued, a new survey from Preqin shows.

A total of 80% of surveyed investors believe that venture capital is overvalued, with either considerable room or some room for price reduction, according to Preqin’s Investor Outlook: Alternative Assets H2 2022 report released Tuesday.

Venture capital is the asset class the research firm views most at risk from current economic and market volatility because venture-backed firms have much in common with publicly listed technology companies that have experienced significant investment losses since the beginning of 2022, according to the report. The report cited as an example the year-to-date loss of 53.2% of ARK Investment Management’s Innovation exchange-traded fund.

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Of those surveyed, 68% said they had concerns over the exit environment as a result, compared to only 33% that express exit-related concerns in the prior survey one year ago.

In addition, only 26% of venture capital investors intend to increase their pace of capital deployment over the next 12 months, down from 43% that expressed that intention in the survey one year ago, while 33% plan to deploy less during the period, compared to only 13% in 2021.

For private equity, only 30% of investors plan to increase their pace of capital deployment over the next year, down from 43% that expressed that intention a year ago.

Private equity investors have echoed the same concerns as venture capital investors regarding the exit environment, according to the report. A total of 67% of private equity investors said the exit environment is a concern that may lead to lower returns, compared with 28% that said it was a concern a year ago.

“The hangover from post-COVID-19 stimulus measures — combined with geopolitical events — has created the perfect storm for risk assets in 2022. In private markets, we have seen a relative shift in preferences towards real assets and away from higher-risk private equity and venture capital investments,” said Cameron Joyce, senior vice president, head of research insights at Preqin, in a news release announcing survey results. “Fresh allocations to alternative assets are likely to continue in the current environment but at a slower pace. That said, more defensive asset classes such as hedge funds and private debt are expected to fair comparatively well.”

The report also said that more private debt investors are shifting their preferences to distressed debt from direct lending strategies because of an expectation of more opportunities resulting from the impact of recessionary pressures on the global economy.

Source: Pensions & Investments