Investor appetite for private equity is coming under strain.

The latest Rede Liquidity Index score – a closely followed industry benchmark – has fallen from 55 to 41 during the second half of this year, indicating that limited partners plan to cut their deployment to PE in the next 12 months.

The survey, which polled 115 global institutional LPs with over €5tn in assets under management, also found that LP deployment to new general partner relationships reached “an unsurpassed low of 39”, down from 45 six months ago, with a significant number of investors planning to reduce their ‘new money’ commitments.

Investors are continuing to shift their focus towards the smaller end of the control buyout market, with a third of LPs planning to ramp up their exposure to lower midmarket buyout funds over the next 12 months.

Midmarket buyouts (31%) closely follow as the next most popular strategy.

Investors’ recent interest in minority strategies has slipped, with only 15% of LPs planning to increase allocations to venture capital in 2023.

Growth equity is the asset class that has seen the biggest decline, with 14% expanding their growth equity exposure, down from 27% 6 months ago.

A key concern for LPs is that they expect significantly lower distributions over the next 12 months.

Overall, 84% of LPs anticipate a reduction in capital returning to them through distributions in the upcoming year.

Healthcare remains the sector most in demand, with 30% of LPs planning to increase allocations to funds in the sector. Further to this, 21% intend to increase exposure to sustainability and impact funds, overtaking technology for the first time, which stood at 17%.

Adam Turtle, the founding partner at Rede Partners, said: “Following the Covid-19 pandemic and rising economic uncertainty, it is unsurprising that investment appetite for healthcare funds remains robust, with these funds benefitting from steady cashflows and revenue streams.

“The RLI also marks the continued rise of impact and sustainability — themes that are taking centre stage not only in PE but across all industries. While the findings indicate a decline in the demand for technology funds among LPs, placed in context, this could be viewed as a levelling out given the extraordinary growth in LP deployment to technology over recent years.”

To contact the author of this story with feedback or news, email Sebastian McCarthy

This article was published by Private Equity News, part of Dow Jones

To contact the author of this story with feedback or news, email Sebastian McCarthy

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