Private Equity Investors Expect Headwinds from Several Directions

The private equity community is starting to grow uneasy, says fund advisory firm Eaton Partners. In a recent survey of more than 60 limited partners (LPs), 69% of respondents said the anti-private equity rhetoric coming from some of the U.S. presidential candidates is a worry, although just 6% rated it as a major concern.

At the same time, Eaton says LPs are also keeping a close eye on geopolitical events and starting to prepare for a possible U.S. economic pullback by taking a more defensive approach to investing. Nearly seven in 10 of respondents to Eaton’s latest quarterly survey said their investment approach has become more defensive, and the share of respondents who expect a recession sometime in 2020 has increased to 50% from 44% in the previous survey.

“Our latest survey clearly shows investors are expecting increased headwinds from several directions as we close out the year,” said Jeff Eaton, partner at Eaton Partners. “Now more than ever, it is vital for general partners and fund managers to clearly articulate their investment visions and strategies with a view towards the projected macroeconomic environment, as we expect LPs to become even more selective and disciplined when allocating investment dollars to the private capital markets.”

The worries about anti-PE rhetoric aren’t all in the minds of LPs. Institutional Investor reported that Sen. Elizabeth Warren, currently the Democratic frontrunner in the 2020 presidential campaign, recently introduced what she called the “Stop Wall Street Looting Act” to broadly regulate private equity.

Another leading Democratic candidate, Sen. Bernie Sanders, has also weighed in on PE funds. “We must ban private equity funds and Wall Street vulture funds from owning hospitals,” he tweeted a few months ago. And the incumbent, Republican Donald Trump, has repeatedly pledged to address the tax break on carried interest.

The rhetoric could be especially problematic, Eaton says, since more than half the survey respondents (55%) believe private equity will be the best performing private market fund class over the next six months. That’s well ahead of private credit (16%), real assets (16%) and hedge funds (13%).

Nearly two-thirds of respondents (65%) believe Trump will be re-elected. Fifteen percent believe Warren will be the next president and another 15% think Joe Biden is headed to the Oval Office.

On the geopolitical front, 43% of respondents reported allocating less direct foreign investment to the U.K. because of uncertainty around Brexit, up significantly from 27% three months earlier. However, despite threats of potential escalation, 61% report the trade war is having no immediate impact on their investment into China, versus 69% who felt the same way in July.

The online survey of 62 top institutional investors was conducted from Sep. 19 through Oct. 4.

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