The North American private markets sector, including areas such as venture capital and private equity and credit, have boomed over the past decade, but rising inflation, borrowing costs and economic dislocations will suppress activity, the report said.

Private capital markets' fundraising in North America is likely to decline in the second half of this year as the economy deteriorates. Venture capital is likely to take the biggest hit in the short term, according to Preqin, the research firm tracking alternative investments. 

Consequently, US investors in these areas are increasingly looking abroad to deploy capital, influenced by the rise in the dollar exchange rate, among other factors, the firm said in a study.

Private market investing has risen in scale relative to public listed equities over the past two decades and, since the 2008 financial crash, the move has accelerated. At the end of December 2021, total private capital assets under management for funds focused on North America stood at $5.56 trillion. In December 2008, AuM was around $1.41 trillion.

A decade of ultra-low interest rates has squashed listed equity and bond yields. Firms are taking longer to list on stock markets, or are even putting off the move completely, in part because listing brings increased reporting obligations.

Although fundraising in the first half of 2022 “looks solid,” Preqin said it expected a “decline in activity in the second half of this year."

“With a weaker exit environment and lower valuations, hold periods are likely to extend, leading to reduced distributions. This could have a knock-on effect for fundraising,” it continued. 

The firm said venture capital funds which deployed capital during 2020 and 2021 are “likely to see valuations fall significantly.” More positively, VC funds with undeployed money – aka “dry powder” – could exploit cheaper valuations for target investments.

In a separate report, Preqin said a survey of more than 300 limited partners in June found that respondents expect private equity and venture capital near-term performance to face the strongest headwinds, with 50 per cent and 55 per cent of them expecting worse performance over the next 12 months, respectively. Venture capital valuations are of most concern, with 80 per cent of investors viewing the asset class as overvalued.

Abroad
The US report also noted that the strong dollar exchange rate could entice more commitments from North American-based investors to flow offshore. 

“A key consideration for US market participants will be whether to focus on domestic investments, or to take advantage of US dollar strength and target markets where currency moves have been the greatest,” the firm said. “UK and European assets may be more attractive, as well as those in Japan. The flip side to this is that international capital may struggle to make its way to the US – another potential headwind to fundraising.”

North America-based private equity reached a record  $2.7 trillion of AuM in December 2021, on the back of year-on-year growth of 23 per cent, the highest in a decade. The environment changed dramatically in 2022, and stocks fell sharply – the tech-rich Nasdaq slumped by more than 29 per cent in the first half of this year, for example. 

“The exit environment and IPO market will remain challenging. GPs [general partners] will be reluctant to accept exits at depressed valuations. Private equity may struggle to sustain its outperformance over public markets as a result,” Preqin said.