Private market investors find themselves in unfamiliar territory heading into 2024. After a sustained period of growth and outperformance for private equity, a mix of strong headwinds in the past year (including record-high interest rates, lingering inflation, rising geopolitical tensions and new industry regulations) have dulled PE’s luster. Through mid-year, fundraising, deal volumes and exit activity were all down, and investors continued to gravitate to larger managers with established track records in an effort to buffer uncertainty.
Despite the bumps, private markets are inherently resilient, and their large investable universe means there will always be good opportunities across sectors. Ahead of our New York September investor luncheon, Monument Group surveyed a group of investors to get a glimpse into their 2024 outlooks.
Increased focus on lower and middle market funds
In terms of their primary focus, a large majority of investors plan to seek opportunities across lower and middle-market funds, with less exposure to large-cap funds. Interest lies in smaller fund sizes that are targeting smaller deals with an eye towards generating outsized returns.
Areas of investment opportunities
Investors are reverting to traditional sectors, focusing on consumer goods, healthcare, industrials and manufacturing, and the business services sectors to find investment opportunities, all core areas of the market that should perform well in any environment.
Emerging managers over emerging markets
Almost all investors were open to selectively investing in emerging manager funds. Although the current fundraising environment is particularly challenging for first time funds, investors are taking a closer look at emerging managers that have a proven “pre-fund” track record and sustainable go-forward strategy and team.
The same cannot be said for emerging markets. Perhaps weary from navigating the uncertainty in developed markets, investors expressed little to no interest in investing in Latin America, Eastern Europe, Africa, and Australia. Investors’ main focus is on the US, Western Europe, and Asia for the foreseeable future.
Appetite for secondaries remains strong
The secondaries market remains tilted toward buyers as we close out 2023. A large majority (88%) of LPs responded that they plan to utilize the secondary market for both opportunistic purchases to diversify portfolios and proactive sales to generate liquidity. Secondary transaction volume remains roughly balanced across LP and GP-led deals, and more than half (54%) of respondents indicated that they plan to invest in GP-led solutions, either in the form of multi-asset continuation funds or single-asset transactions. Investors and general partners are increasingly utilizing the secondary market as an important portfolio management tool. For investors, secondary purchases can provide an attractive entry point for gaining access to high-quality assets during periods of high volatility.
Top macro concern: Fed over-tightening
When the US Federal Reserve Board announced its last rate hike in late July, it marked the 11th increase in just 17 months. This has been an aggressive bid to stifle inflation, and 44% of our LPs cited the risks posed by further tightening as their top macro concern going into 2024.