As voters go to the polls in the presidential elections today, here is an article looking at some of the longer-term investment matters that wealth firms have been wrestling with, such as private equity as an asset class.

It seems investors haven’t – possibly until recently – been able to get enough of private equity. The asset class is singled out as an area by family offices, as a recent Family Wealth Report conference in New York highlighted (see here), and the sector has seen less compression on its fees than among hedge funds.

Recent figures have certainly helped to pique interest. According to Preqin, the research firm, private equity fund managers returned a record $443 billion to investors through 2015, up from $424 billion the previous year (figures for 2016 will have to wait, of course, until next year). Separately, that organization has reported that the whole private capital industry - in contrast to that of publicly quoted equity or tradeable debt - has seen median net internal rates of return (IRR) steadily climb in recent years, and among 2012 vintage funds they have reached their highest level since 1995. No wonder investors are keen. But are there grounds for concern?

One suggestion that the sector might be suffering a sharp bout of indigestion are figures showing a drop-off in fund-raising levels by private equity players. Preqin recently said that momentum of fund-raising slowed in Q3, with 246 private capital funds raising a combined $122 billion, slowing from $173 billion in Q2. The red-hot pace of 2015 has been hard to sustain.

Capacity may be an issue beyond simple financial amounts. As if to drive the point home, SEI, in a recent report called The Future Of Private Equity, said demand has been rising but managers of funds have a talent squeeze.

Jim Cass, senior vice president and managing director of SEI’s Investment Manager Services division said: “To capitalize on this growth, however, GPs must address the unprecedented obstacles facing them - mainly seen as an increasing talent shortage, the complex web of regulatory requirements and myriad new operational challenges.”

SEI observes how private equity has exploded from being a niche area two decades ago to becoming increasingly mainstream today. Since 1995, private equity assets have surged from $30 billion to approximately $4 trillion 20 years later. SEI surveyed more than 200 private equity general partners, limited partners and consultants and from that audience it found that 71 per cent of respondents said the most obvious change has been rising demand for more transparency about how well the asset class performs, what it costs and what the risks are. 

Some 64 per cent of LPs expect to increase their exposure to private equity, a dramatic gain from 26 per cent five years’ ago, the report said.

Less happily perhaps, more than eight out of 10 GPs say compliance costs are climbing faster than other operating expenses.

Pictet, the Swiss private bank, recently noted that there has been less downward pressure on the fees of private equity funds than with hedge funds; tepid performance by hedge funds hasn’t helped. (See the item here). The bank also said it was not particularly concerned about leverage, an issue that proved a problem for private equity in the 2008 financial crisis as credit market locked up. Pictet has also noted that private equity has seen less fund-raising so far this year than in 2015. 

Family offices and other wealth managers are certainly being encouraged to look at such alternative assets at a time of low or even negative interest rates. All asset classes hit speed-bumps eventually - the question is whether the rapid ascent of private equity over the past two decades can continue at that rate in the next 20 years without a few sharp pauses for breath.