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LPs eye uptick in fund closing before year end, plan to up private market commitments in 2022

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Institutional investors remain constructive on private capital markets amid a backdrop of rising inflation, potentially higher interest rates and increased scrutiny on ESG issues, new research from Eaton Partners shows.

More than 70% of respondents to the firm’s latest LP Pulse Survey think an uptick in fund closings is either possible or likely before the end of the year, although more than a third (38%) of those respondents admit there could be a delay into 2022.

Roughly two-thirds are planning to increase private market allocations next year, it added, with investment strategies of particular interest including buyouts (44%), venture capital (44%), growth equity (42%), and private credit (40%).

A fund manager’s track record (89%) is considered the most important factor when evaluating a potential new investment, followed by strategy (62%), management team (58%), and fees (36%), the report said.

Eaton added that although the pace of return varies, an overwhelming number of LPs surveyed (82%) expect to be back in the office at some point, and three-quarters (76%) view any COVID-induced changes in the fund marketing process as temporary.

Jeff Eaton, global co-head and managing director at Eaton Partners, said, “As the world navigates new challenges related to the ongoing pandemic, inflationary pressures, supply chain disruption, and market volatility, LPs remain confident in the ability of private capital markets to weather these storms.

“Institutional investors are laser-focused on the financial performance of fund managers as they look to target and increase their allocations in the private markets.

“This back-to-basics approach is indicative of an industry adjusting to continued volatility and uncertainty among many external factors.”

The survey also indicated the threat of inflation and potentially higher interest rates are also factoring into strategic planning, as is increased scrutiny of ESG and socially responsible investing (SRI) considerations.

Almost 90% of respondents were at least somewhat concerned about heightened inflation, with 13% consider themselves “very” concerned.

And while the US Federal Reserve has indicated higher interest rates are on the horizon, that doesn’t yet appear to be a major concern for investors, with 74% say rising rates would have little to moderate impact on investment allocations. Only 11% said the impact would be significant.

ESG factors are an increasing catalyst for investors, Eaton partners added, as roughly three-quarters (73%) say they’re either focused or will put increased focus on climate change, and nearly one-third (32%) believe being socially responsible investors likely improves investment returns compared to 16% who think such a focus would hurt returns.

Eaton managing director Peter Martenson said, “The current investor sentiment indicates strong confidence in the private capital markets as the macroeconomic future remains in flux with day-to-day adjustments to the hybrid post-pandemic workplace.

“Fund managers that are willing to adapt to the rapidly shifting needs of limited partners, such as a focus on ESG factors, while providing exemplary service in an environment that is opaque, will be the ones that excel in tomorrow’s markets.”

The online survey of 46 institutional investors was conducted from September 14 through September 30.

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