Alternative Investment Professionals Reveal Bullish Outlook for Private Equity, According to EisnerAmper Survey

• Private equity seen as primed for LP allocation and ESG investment

• Regulatory crackdowns in China are not deterring alts investment strategies

Alternative investors see continued opportunity within the private equity industry after a record-breaking year, according to a new survey of alternative investment professionals by advisory and accounting firm EisnerAmper. The survey, which was conducted during EisnerAmper’s 6th Annual Alternative Investment Summit, revealed that half of respondents (51%) expect private equity to be the asset class LPs increase investment allocations the most over the next 12 months, with 27% and 22%, respectively, stating venture capital and hedge funds.

Private equity beat out venture capital and hedge funds as the industry that alternative investors see as most primed for ESG investment in the next three years. Barriers to implementing ESG still remain, however, with alternative investors citing the lack of standardized reporting and data sets (48%) as the biggest barrier, followed by sourcing quality investment opportunities (20%) and dispelling the notion of poor returns (17%).

The survey also found that the world’s second-largest economy is still very much investible as 92% of private equity and venture capital professionals have not changed their investment strategy in China amid the recent regulatory crackdowns on private companies. Only 3% of hedge fund professionals selected the regulatory crackdowns in China as the factor expected to most impact investments to hedge funds over the next 12 months.

When asked to name the two industries that offered the best investment potential for the remainder of Q4 2021, 50% of all respondents named technology. Healthcare/life sciences was named as a top sector by 39% of respondents, and infrastructure (23%) rounded out the top three. Notably, while technology and healthcare/life sciences were cited as top sectors in 2020’s survey, infrastructure saw increased interest compared to last year, when it received only 9% of the vote.

“Despite the lingering effects of the COVID-19 pandemic, a new administration and ongoing geopolitical events, 2021 was a very good year for alternative investment managers,” said Peter Cogan, Managing Partner of EisnerAmper’s Financial Services Industry. “The survey revealed that investors are adapting their strategies to take advantage of these micro-and macro-economic trends to generate alpha.”

Private markets investors expect increased LP interest in growth equity and impact strategies

When asked which two strategies private markets investors expected LPs to increase allocation to most in the next 12 months, growth equity (37%) and impact (31%) emerged as most popular. Differentiated strategies can give firms a leg up while facing high valuations amid a competitive landscape, which was identified as the factor that could most impact investments by private equity and venture capital over the next 12 months.

On the hiring front, PE and VC professionals are looking to bolster their investment teams in order to capitalize on the hot dealmaking environment. Forty-five percent of firms expect to hire for their investment teams in the next 12 months, up from 27% in 2020, while 31% expect to hire for their operations teams. Outsourcing has also grown in popularity within the private markets with 61% of firms already outsourcing back-office/middle-office functions or planning to do so in the next 12 months.

However, PE and VC professionals are aware of the challenges that their industries face going forward. The top two challenges for the next 12 months were cited as increases in capital gains tax rates and escalating regulatory scrutiny/compliance obligations. While topics like dealmaking and trade policy dominated conversations about challenges for these industries in the past few years, it’s clear that PE and VC professionals have shifted their focus elsewhere.

“PE and VC have had a strong year on the dealmaking front, and we expect this trend to continue as LPs are keen to invest and investment teams are looking to hire,” said Cogan. “There are certainly challenges ahead when it comes to taxes and regulations, and we’re seeing firms address this by outsourcing some of their back- and middle-office functions to service provider experts while they focus on their portfolios and LPs.”

Hedge funds diversifying their strategies; slower to adopt AI and ESG

While long/short and global macro strategies continue to be hedge funds’ bread and butter, one-third of respondents expect LPs to increase investment allocation to event-driven in the next 12 months, followed by credit (25%) and quant (17%). The high number of corporate actions throughout the year, including mergers and acquisitions, restructurings and the rise of the retail investor, could explain the increased interest in event-driven strategy. When asked to name the top challenge for their business, hedge fund executives noted escalating regulatory scrutiny and compliance obligations (30%) followed by increases in capital gains tax rates (27%).

EisnerAmper’s survey also found that hedge funds are slower to adopt artificial intelligence and machine learning to make investments or trades, with 85% of respondents stating that their hedge fund does not utilize these tools. ESG implementation follows a similar trend. Just 17% of executives noted that their company has an ESG portfolio, similar to the number of executives who said so in last year’s survey.

“There was a resurgence of investor interest in hedge funds this year propelled by global growth, fiscal stimulus and low interest rates,” said Cogan. “We’re continuing to see investors deploy more capital to the asset class to diversify their portfolios and generate returns.”

Featuring a fireside chat with Barbara Corcoran and Daymond John of ABC’s Shark Tank, as well as speakers from Institutional Limited Partners Association, Cota Capital, New Holland Capital, Glazer Capital and other leading alternatives firms, EisnerAmper’s 6th Annual Alternative Investment Summit took place virtually on October 7, 2021. EisnerAmper’s survey incorporated feedback from 184 event attendees, which consisted of CFOs, COOs, CIOs, CAOs, controllers, portfolio managers and operations specialists from across the alternatives industry.