Institutional investors expect asset valuations to be the key challenge for generating returns in the private equity industry this year, according to a recent survey by alternative assets data tracker Preqin.

Almost three-quarters (72%) of investors surveyed by Preqin said that valuations are a concern this year.

As many as 32% of investors also cited the ability of fund managers to successfully exit investments as a key challenge for generating returns in 2019.

“Exit figures generally reflect this sentiment, as the aggregate value of private equity-backed buyout exits has been on a general downward trend since 2014, and the ratio of deal to exit value has been rising in recent years," said Preqin. However, it added that investors continue to see a good number of exits with the total remaining consistently high in the past five years at close to or above 2,000.

Despite concerns for the year ahead, Preqin said investors surveyed largely reported that they are satisfied with how their investments in the asset class fared in the past year with 64% of investors saying that the asset class performance met their expectations, while more than a quarter (26%) said returns exceeded expectations.

Across vintage years 2011-2015, buyout funds have delivered a median net IRR (internal rate of return) of 16-21%, followed by venture capital (13-21%) and growth (10-18%) funds.

However, despite the past track record, concerns on valuations and exits have dampened investor optimism a bit, as around a third of investors feel their private equity portfolios will perform worse than they did in 2018, up from 20% at the end of 2017.

“This reduced confidence is unsurprising considering that 10% of investors said the returns from their portfolios in 2018 did not meet expectations, up from 5% in 2017 and the largest proportion since December 2013 (11%)," said Preqin.

From an allocation point of view, the survey showed that large buyout funds are seeing a dip in interest from limited partners (institutional investors that invest in PE funds).

According to the survey, 54% of investors say small to mid-market buyout funds offer attractive opportunities in the current market. A total of 18% of investors believe that large to mega buyout funds present favourable opportunities, down from 21% in December 2017.

Growth funds have seen rising investor interest in recent years, and 29% of investors feel they present the best opportunities in the current environment.

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