Private-equity investors want to keep investments steady despite turbulence

Private-equity investors have learned from past recessions and hope to keep commitments to the asset class steady no matter what 2023 throws at them, according to participants at the International Private Equity Market conference in Cannes, France.

Recent downturns, particularly the financial crisis of 2007 through 2009, have persuaded many institutional investors that slumps can be the best times to commit to private funds. Most institutions that invest in private equity aim to continue putting money into new funds at a steady pace despite challenging macroeconomic conditions, said attendees at the conference, including private-fund managers and limited partners.

Despite rising interest rates and the denominator effect—a phenomenon in which falling public markets force institutions to reduce commitments to private markets—most investors seem to be trying to hold new commitments to private-equity funds steady, said Tom Masthay, deputy chief investment officer of the roughly $34 billion Texas Municipal Retirement System.

“Most [investors] seem to be heads down, still allocating capital, and trying to stick it out with relatively even allocations over time,” he said during a panel discussion Tuesday.

Following the financial crisis, many institutional investors learned it is best to deploy capital steadily, because funds backed during economic downturns can produce higher-than-average returns, said Bruno Sollazzo, head of private-equity investments at Italian insurer and asset manager Generali Group.

“Because of specific features of private equity, it’s essential to keep a consistent investment strategy over time,” he said. “Experienced [general partners] and LPs know this really well and so they should remain in the markets and continue to invest new capital.”

The possibility of a major recession this year, and how the private-equity industry will respond, provoked much discussion at the IPEM conference.

Institutional investors acknowledged that despite their intention to keep allocations to private equity steady, fundraising has become far more difficult for asset managers than in previous years.

Some investors welcome the change. Piet-Hein den Blanken, managing director of primary fund investments for asset manager AlpInvest Partners, said the balance of power between general partners and limited partners is shifting back toward investors, which he sees as a positive development.

“As an LP, I don’t mind fundraising to be a bit harder, a bit slower,” Mr. den Blanken said. However, he said he remains convinced private equity as an asset class should stay strong over the long term.

Challenging macroeconomic conditions over the past year pushed investors toward large and experienced fund managers, said Alessandro Tappi, chief investment officer of the European Investment Fund.

“First-time funds are the last ones to be considered,” he said.

As the industry consolidates over time, there could be far fewer private-equity funds, perhaps up to 30% fewer, Mr. Tappi said.

Still, despite current fundraising challenges, conference attendees repeatedly emphasized their intention to block out immediate anxieties and keep committing to new funds.

“Steady deployment is absolutely key, because otherwise you risk being pro-cyclical,” meaning you invest more when prices are high, said Helen Steers, a partner at private asset manager Pantheon Ventures. “We all know from the academic research that in some ways you ought to be anti-cyclical, [and] put more money in when times are difficult.”