LPs say PE and VC returns will easily beat crypto in next 12 months

Optimism on PE reigns after successful 2021, but several factors could soften valuations.

A majority of private equity limited partners believe the asset class will deliver the best returns over the next year, well above the forecasts for other strategies, according to a fresh survey from Commonfund.

The asset manager polled 150 endowments, foundations, pensions and other institutional investors at its 24th annual Commonfund Forum. The vast majority (70 percent of respondents) said PE will deliver the best risk-adjusted returns over the next 12 months. The second- and third-most popular strategies were private real assets (41 percent) and venture capital (37 percent).

Public equities came in fourth (29 percent), followed by private credit (19 percent). Cryptocurrencies came in dead last, with just 10 percent of respondents saying they expected digital currencies to provide the best returns.

“Over long periods of time, we’ve seen private equity and venture capital outperform public equities. And in the most recent few months, we’ve seen that happen by dramatic amounts,” said Commonfund president and chief executive Peter Burns in an interview about the survey results.

The survey comes off the back of results recently released from several state pension funds that showed strong returns in private equity. Those results have been tempered by some investment officers who expect softer returns as a result of various headwinds like inflation, supply chain disruptions and geopolitical instability.

Florida State Board of Administration in late March reported a 56.6 percent annual return on its private equity holdings. Kansas Public Employee Retirement System earned a 50.3 percent return in 2021. State of Wisconsin Investment Board returned 47.5 percent.

Investors at the Commonfund conference said the biggest prevailing threats to the economy were inflation and geopolitical tensions headlined by the Russian invasion of Ukraine.

“We don’t think inflation is going to end soon,” Burns said. “It feeds on itself. To date, we have not seen much of a squeeze on margins, even with price increases and increased labor costs. We’ve talked again and again and again with different executives and PE firms about labor shortages.”

Concerns about volatility in public tech stocks have also caused jitters about private company valuations.

At Florida SBA’s last investment committee meeting, senior investment officer John Bradley said, “We expect to see some softness in that area of the portfolio. However, we do think the private piece will hold up somewhat. It appears to be a mixed bag, but we do expect performance to pull back a bit based on what public markets are doing.”

However, Commonfund’s Burns said he thinks mature technologies that are beyond early financing rounds will retain strong valuations in the coming months. As an example, he cited companies that develop human resources-focused software that manage everything from hiring processes to tracking expenses.