New structures such as ESG funds are appearing, says Jersey-based global professional services business JTC Group.

JTC said this week that the UK and European private equity industry is not suffering a significant downturn prompted by investors turning to more traditional asset classes – in spite of higher interest rates leading to real returns being generated by bond portfolios for the first time in a decade.

The past decade or more has seen a flood of money into private equity, venture capital, private credit and forms of property as investors have sought yields in a time of ultra-low or even negative interest rates. They've been willing to hold less liquid assets because yields on government bonds and equities got squeezed. But as interest rates have started rising to curb inflation, some of those considerations have shifted.

“That’s not to say that PE managers are not having to respond to a series of challenges,” Marie Fitzpatrick, senior director at JTC Group, said in a note.“For example, buy-out funds are becoming less popular, notably in continental Europe, and capital allocation targets are changing.” 

JTC Group acted for more than 250 private equity funds in 2022 and, reviewing current anticipated mandates, Fitzpatrick noted a significant shift towards new, relatively untravelled investment sectors, handled by specialist managers.

“We are seeing a new crop of private-debt orientated funds designed to meet the funding needs of middle-sized companies who are finding banks less prepared to offer lines of credit in the current financial environment. At the same time, real-estate, infrastructure and healthcare (and healthcare-tech) funds, are in vogue and PE managers are increasingly running individual teams to handle these separate classes,” Fitzpatrick continued.

“Everyone is trying to differentiate themselves at a time when it is becoming harder than ever for new managers to attract capital primarily because investors are looking for track record, and are tending to re-up [renew] with managers they have worked with before,” she said.

“Furthermore, in terms of fund size, there are fewer deals at the top of the market so average deal sizes are coming down. In part, this may explain the increasing enthusiasm among managers and investors for alternative funds which currently include digital, consumer retail, and, in a couple of cases, music royalties. That said, ESG focused funds, notably natural resources, and private debt seem to be this season’s big movers," Fitzpatrick concluded.

A report on The Future of Alternatives In 2027 by Prequin, the home of alternatives, also shows that the combination of higher interest rates and slower overall economic growth is likely to impact private equity as an asset class. 

Nevertheless, the firm expects that private debt will attract more attention from traditional fixed income investors and that real estate could be relatively well protected. It also expects global infrastructure to gain ground on real estate by 2027. See more here.