Investors are shrugging off signs of overheating in private equity and are still allocating capital to that asset class, as more companies delay listing on the public markets.

The “significant” increase in demand for private equity has coincided with changes to how companies are choosing to raise capital, according to a report by The Thinking Ahead Institute, which is sponsored by Willis Towers Watson. It said regulatory pressures and higher costs were forcing more businesses to tap private markets where there is an “abundance of available capital.”

“There are legitimate concerns regarding the current state of private equity investment, notably the signs of overheating at the larger end of the buyout segment,” the report said. “But that is not a reason to ignore private equity totally,” it said.

Investor demand for private equity has seen the industry grow by more than 500 per cent since 2000 to be valued at over US$3 trillion, according to the CFA Institute. That willingness to invest has also seen the amount of dry powder mount up as yield-hungry investors compete for deals. Researcher Preqin Ltd. estimated that the amount of available capital in the private markets for fund managers to deploy hit US$2 trillion last year.

Despite the risks, private equity is set to become increasingly important for institutions, according to the report.

Liang Yin, senior investment consultant at the Thinking Ahead Group, said that with more companies choosing to list at the later stage of their development, investors who wait for an initial public offering run the risk of missing out on “significant growth.”

“Companies are no longer using public markets in the same way,” he said. “The decision to list is increasingly driven by the desire to cash out and that normally happens when businesses reach a scale so large that only the public market provides enough liquidity.”

Yin called for innovation in the way investors access private equity in order to encourage wider participation. He said crowdfunding platforms could evolve to become the “new private stock exchanges” for institutions.

“Whichever path firms choose to follow in the future, the private equity market looks likely to form a bigger part of the institutional landscape going forward,” he said.

 

Sarah Jones worked for Bloomberg news in London for 12 years covering equity markets and global asset management. Prior to that she worked for Australian Associated Press in Sydney covering economics and monetary policy.
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