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.
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.
Meanwhile, investors are experiencing growing interest in hedge funds as a way to take risk off the table. A total of 76% survey respondents said they plan to increase or maintain their allocations to hedge funds in the next 12 months, up from 63% in the survey a year ago. The report said that while the percentage eager to maintain or increase allocations to hedge funds is greater than the 72% that responded with that answer in the 2020 survey, investors are less bullish than then. Only 26% of respondents plan more capital to hedge funds over the next 12 months, compared with 44% of respondents planning that in the 2020 survey.
Real estate investors, meanwhile, are most concerned about interest rates increases. A total of 74% of respondents said this is their most significant challenge. The report goes on to say that while real estate asset valuations take more time to be reflected in private markets, deal flow may suffer. A total of 28% of respondents plan to deploy less capital into real estate over the next 12 months, up from 22% in the survey a year ago.
In infrastructure, 43% of investors said they plan to deploy more capital over the next 12 months, while 40% plan to maintain their current pace. Infrastructure investors too have interest rates as their top challenge, with 57% expressing this concern, up from 26% in last year's survey.
Finally, natural resources investors are not confident that strong performance is going to continue, given macroeconomic concerns and the overall volatility of commodities. In this year's survey, the most cited absolute return range targeted for the coming year was 5% to 8%, compared to 8% to 10% last year.
A spokeswoman could not be immediately reached for further information on the universe of survey respondents.
The full report is available to Preqin Insights+ subscribers on its website.
