Challenges facing private equity, hedge funds affect institutional investors
Date
5/29/2024 8:00:25 AM
(MENAFN) Private equity firms and hedge funds are grappling with significant obstacles in returning funds to their clients, a situation that reverberates across the broader financial landscape, particularly affecting institutional investors such as pension plans, foundations, and endowments. These institutional investors, crucial for hedge funds in raising capital, are increasingly constrained by liquidity issues, hindering their ability to invest in these funds.
A contributing factor to these challenges lies in the declining distributions received by investors from private equity funds. According to Michael Monforth, global head of capital advisory at JPMorgan Chase, this decline in distributions from private equity, debt, and mutual funds has a cascading effect, prompting some investors to curtail new investments in illiquid funds and reduce commitments to funds, particularly those focused on the most liquid hedge funds.
Data from Bain & Co.'s annual private equity report further illustrates the gravity of the situation, revealing that exits dwindled to USD345 billion last year, marking their lowest level in a decade. Consequently, the private equity industry finds itself burdened with a record backlog of approximately 28,000 companies valued at over USD3 trillion. The sluggish pace of deal closures compounds the challenge of returning capital to investors.
Nick Moakes, chief investment officer at the £36.8bn Wellcome Trust, underscores the impact of diminished private equity distributions on the broader investment landscape. With the IPO market showing weakness and mergers and acquisitions experiencing delays, private equity firms grapple with the formidable task of disbursing funds to investors.
The competition for institutional investor allocations intensifies as both hedge funds and private equity fund managers vie for a share of the "alternatives" allocations. These allocations encompass various asset classes such as private credit, infrastructure, and real estate. However, as distributions from existing assets dwindle, the ability of institutional investors to commit to new investments across the portfolio is compromised.
Sunaina Sinha Haldia, head of private capital advisory at Raymond James Wealth Management, emphasizes the interconnectedness of these challenges. For many institutions, private equity and hedge funds constitute a significant portion of their alternatives portfolio. The shortfall in allocations from the private markets portfolio has ripple effects, constraining their capacity to make new commitments across various asset classes, including hedge funds.
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