Sovereign wealth funds (SWFs) are expected to grow in importance as key sources of investment into private equity in the coming year, when pension funds are said to be reducing their asset allocation to private markets.

The increase of SWF influence also takes place as investors in private equity funds – known as limited partners (LPs) - are expected to gain more power in an environment where fundraising is difficult.

Research among 188 general partners (GPs) – the professionals at private equity firms – found those who cited SWFs as a more important source of funds increased to 27% this year from 19% last year. However, the sector’s main source of funds – family offices and wealthy individuals – still scored highest, at 45%.

In what 72% of respondents expect to be a highly challenging exit environment for private equity this year - and coupled with expectations that fundraising will also be harder - the private capital market will be LP-led in 2023, said IPEM, the events business that sponsored the research. Over three-quarters of the survey’s GP respondents said LPs would hold more power.

Meanwhile, ESG forms the biggest internal priority for firms in 2023, just as it did last year. Climate tops the ESG list, and 69% of GPs felt private equity could provide “serious answers to climate”.

Fund reporting and transparency also featured highly as priorities.

Despite a more negative view of the sector’s landscape, just as many funds as last year (two-thirds) still expect to raise money, and opportunities are expected to come about by a greater need for restructuring in portfolio companies. IPEM linked this finding to a generally positive sentiment about deal-making and capital deployment.

Antoine Colson, IPEM chief executive, said the wider results in the report illustrated “positivity and optimism” among GPs in the industry.

“If I have a concern, it is whether this drive and enthusiasm will be shared by LPs.”

Pension funds and insurance companies were seen as allocating less to private equity and “struggling with less distribution and adverse J-curve effects”, Colson added.

At a conference last year, Johanna Kyrklund, co-head of investment and group chief investment officer at Schroders, said defined benefit (DB) pension plans would probably find they cannot take as much risk on growth assets when central banks are dealing with inflation and financial stability simultaneously. Deleveraging could lead to lower levels of DB scheme investments in illiquid assets, she said.

A recent RBC BlueBay survey showed fund selectors were positive about public-market investments and did not expect to increase allocations to private markets. However, other research published in September last year suggested fund selectors would seek help from private markets investments in order to combat inflation.

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