Three times more private equity managers are planning to cut targeted returns than increase them, according to data provider Preqin.
More than a third of managers surveyed in November said they planned to reduce the targeted returns of their funds in the market because of high valuations.
Just 11% planned to increase targeted returns.
This was against a backdrop of increased investor appetite for private equity and increased competition for deal opportunities among managers. More than 90% of respondents said finding attractive investment opportunities was just as or more difficult than 12 months ago, according to Prequin.
Already high prices were going even higher, with 92% of private equity fund managers having identified valuations as a key challenge for this year.
Christopher Elvin, head of private equity products at Preqin, said: “Although fund managers remain confident in their ability to find value and deliver returns, significant proportions are now planning on reducing their targeted returns for future funds, recognising that the industry’s strong historical performance cannot continue indefinitely.
“The twin pressures of pricing and competition show no signs of abating, and with the huge influx of investor capital set to continue in 2018, the industry faces a critical juncture.”
Denmark’s statutory pension fund ATP has decided to drop venture capital from its investments, with the managing partner of its private equity unit saying that it had not been able to find enough interesting opportunities in that segment. Reducing complexity was the main reason for the move, however.
The mid-market segment, meanwhile, was “pretty brutal and there is a lot of competition there”, Hogan Lovells’ head of private equity has said.
Preqin reported in August that there was more than $900bn (€730bn) in uninvested capital, or “dry powder”, available to private equity funds.
Several pension investors have done well out out of private equity recently, or at least been active in the area. Ilmarinen, one of Finland’s largest pension insurance companies, netted a 26.8% return from unlisted equity investments for 2017.
PFA, Denmark’s largest commercial pension fund, completed several large private equity and infrastructure deals as part of consortia last year, and its CEO said it had “great expectations for all the investments as they also establish PFA as an attractive business partner on the international stage.”
In Norway, academics have said the country’s sovereign wealth fund would benefit from investing in private equity. The fund’s manager has advocated a 4% allocation.