Investors weary of public markets moving to alternatives, Pepperdine study finds

Institutional investors have become wary of the public markets in the past year and have started to allocate more money to alternative investments, including private equity and venture capital.

According to results from the 2021 Private Capital Markets Project from Pepperdine University’s Graziadio Business School, 56% of respondents increased their allocations to private equity in the past 12 months, with 19% upping their allocations to venture capital.

Conversely, hedge funds saw a 4% decrease in allocations in the last 12 months.

Craig Everett, Ph.D., finance professor at Pepperdine Graziadio Business School and director of the Pepperdine Private Capital Markets Project said, “In anticipation of a crash, I think a lot of investors are looking to get out of the public stock markets and find other places to put their money. A lot of investment funds, such as VC funds and private equity funds, are flush with money now.”

And, in the current environment, demand for private equity is skyrocketing, with nearly 66% of respondents indicating demand for private equity is up from twelve months ago, this is up from 44% in January 2020.

With so much capital rushing to alternatives, private equity funds will be looking to deploy this new capital over the next 12 months, across several industries. A quarter of funds are expected to target consumer goods & services, 24% are looking to manufacturing, and 14% are targeting deals in business services.

On the other hand, 40% of venture capital funds are targeting healthcare and biotech, while 26% are looking for information technology deals.

One of the biggest issues to hit private equity was the COVID-19 pandemic, with approximately 42% of respondents indicating their deal flow decreased slightly, while 19% said their deal flow decreased significantly.

However, Everett said in recent discussions, large capital providers originally thought deal flow was going to be impacted more than it was.

“A lot of people who participated in the survey thought things would get back to pre-Covid levels later this year or early in 2022, but recently people have said they may have overestimated that because there is so much money flowing that it seems things have gotten back to at least pre-March 2020 levels,” he added.

Indeed, venture capital funds expect to be busier in the next 12 months, with 85% of respondents planning to make three investments or more. In 2020, 65% of respondents said they planned to make three or more investments over the course of the year.

Additionally, 45% of venture capital professionals expect deal flow to return to pre-COVID-19 levels this year.

However, when investing in startups, the survey indicated that investors in startups may have to wait a little longer to see their returns. The median expected time to exit for venture capital growth-stage investments is now 5 years, which is up from 3.5 years in the previous year’s survey. This is not surprising, Everett said.

“Due to COVID, last year was unique. Startups still started, and VCs still invested, but exits were not quite as predictable. Many founders and investors undoubtedly felt that delaying exit for a little while might be beneficial.”

As for the exit plans for venture capital these days, 35% plan to sell their portfolio companies to a public company, 22% are planning to sell to a private company, 17% are planning to sell to a private equity group, and 16% are planning to do an IPO.

Finally, according to venture capital professionals, the biggest emerging issues facing privately-held businesses are economic uncertainty (55%), inflation (55%), and labor availability (45%). For PE funds, 33% of respondents believe impact from COVID-19 is the most important current issue facing privately-held businesses, while 28% feel government regulations and taxes is the most important emerging issue, while 23% think the biggest issue is inflation.

Jennifer Banzaca

Jennifer Banzaca has been a reporter and editor covering the hedge fund industry for 14 years, most recently focusing on legal and compliance issues.
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