Preqin Investor Outlook Alternative Assets H1 2018 PDF

PREQIN
INVESTOR OUTLOOK:
ALTERNATIVE ASSETS
H1 2018
Private Equity ■ Venture Capital ■ Hedge Funds ■ Real Estate
Infrastructure ■ Private Debt ■ Natural Resources
CONTENTS
Foreword 2 5: REAL ESTATE
Introduction 40
1: ALTERNATIVE ASSETS Satisfaction with Real Estate 41
Participation in Alternative Assets 4 Investor Activity in 2018 42
Perception and Expectations 5 Key Issues in 2018 43
Fund Selection and Marketing 6 Expectations and Opportunities 45
Fund Terms and Alignment of Interests 7 Fund Terms and Alignment of Interests 46
How Investors Source and Select Real Estate Funds 47
2: PRIVATE EQUITY Sample Real Estate Investors to Watch 48
Introduction 10
Satisfaction with Private Equity 11 6: INFRASTRUCTURE
Investor Activity in 2018 12 Introduction 50
Key Issues in 2018 13 Satisfaction with Infrastructure 51
Expectations and Opportunities 15 Investor Activity in 2018 52
Fund Terms and Alignment of Interests 16 Key Issues in 2018 53
How Investors Source and Select Private Equity Funds 17 Strategies and Geographies Targeted 55
Sample Private Equity Investors to Watch 18 Fund Terms and Alignment of Interests 56
How Investors Source and Select Infrastructure Funds 57
3: VENTURE CAPITAL Sample Infrastructure Investors to Watch 58
Introduction 20
Satisfaction with Venture Capital 21 7: PRIVATE DEBT
Investor Activity in 2018 22 Introduction 60
Key Issues in 2018 23 Satisfaction with Private Debt 61
Strategies and Geographies Targeted 24 Investor Activity in 2018 62
In Focus: Investing in Venture Capital 25 Key Issues in 2018 63

Fund Terms and Alignment of Interests 64
How Investors Source and Select Private Debt Funds 65
4: HEDGE FUNDS
Sample Private Debt Investors to Watch 66
Introduction 28
Key Issues in 2018 29
Investor Outlook on Performance 30 8: NATURAL RESOURCES
Investor Outlook on Fees 32 Introduction 68
Investor Activity in 2018 34 Satisfaction with Natural Resources 69
Emerging Trends 36 Investor Activity in 2018 70
How Investors Source and Select Hedge Funds 37 Key Issues in 2018 71
Sample Hedge Fund Investors to Watch 38 Strategies and Geographies Targeted 72

Fund Terms and Alignment of Interests 73
How Investors Source and Select Natural Resources Funds 74
Sample Natural Resources Investors to Watch 75
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1
PREQIN INVESTOR OUTLOOK: ALTERNATIVE ASSETS, H1 2018
FOREWORD
T he alternative assets industry has gone from strength to strength in recent years as institutional investors have allocated heavily to
alternatives, driven by their search for diversification and improved returns in a low-yield environment. As investors become more
sophisticated in their understanding of these investments, the industry continues to evolve and new challenges and opportunities
emerge.
In this report, we present the results of our survey of over 550 investors, carried out in December 2017, in which investors were asked
for their views on the state of the industry and outlook for the future. As investors go into 2018, sentiment with respect to alternatives
remains noticeably positive, with the majority of respondents reporting that their return expectations had been met or exceeded over
the past year. Even hedge funds, which have faced negative sentiment in recent years from investors concerned about performance and
high fees, saw a notable improvement in both returns and investor sentiment over the course of 2017.
Nevertheless, investors have a number of concerns about alternative assets, particularly in relation to asset valuations and fund
performance. With large amounts of dry powder now held by private capital fund managers and high multiples being paid for assets,
there is less margin for error and many investors reported concerns that performance could fall across private capital funds in future.
Similarly, while the performance of hedge funds as an asset class was much improved in 2017, performance and fees remain investors’
top priorities for the asset class.
Looking ahead, the prospect of future interest rate rises and the unwinding of central bank stimulus policies pose new challenges for the
alternatives industry, as the low-yield environment which has helped to encourage investment in alternative assets may begin to change.
However, the institutional investors Preqin surveyed remain committed to alternatives as part of their portfolios, with the majority
planning to maintain or increase their allocation over the longer term across all alternative asset classes.
Preqin’s online platform is an indispensable fundraising and investor relations tool for any firm managing or looking to manage
institutional capital. Thousands of professionals use Preqin every day to source new investors, access exclusive information on new RFPs
and fund searches, monitor the market and track competing firms.
To find out how Preqin’s services can help your business in the coming months, please contact at us at info@preqin.com or at our New
York, London, Singapore, Hong Kong or San Francisco offices.
RESPONDENTS BY INVESTOR LOCATION RESPONDENTS BY INVESTOR TYPE
NORTH AMERICA
19% PUBLIC PENSION FUND
51%
EUROPE FAMILY OFFICE

17%
30%
ASIA-PACIFIC PRIVATE SECTOR PENSION FUND
14%
13% ASSET MANAGER

10%
9% INSURANCE COMPANY
FOUNDATION
7%
REST OF WORLD ENDOWMENT PLAN
4% BANK
4%
6%
16% OTHER
2 © Preqin Ltd. 2018 / www.preqin.com

SECTION ONE:
ALTERNATIVE ASSETS
PARTICIPATION IN
ALTERNATIVE ASSETS
INSTITUTIONAL INVESTORS BY NUMBER OF ALTERNATIVE ASSET CLASSES INVESTED IN
None One Two Three Four Five Six
20% 15% 13% 15% 15% 12% 10%

Source: Preqin Online Products
PROPORTION OF INSTITUTIONAL INVESTORS ALLOCATING TO EACH ALTERNATIVE ASSET CLASS
Private Equity Hedge Funds Real Estate Infrastructure Private Debt Natural Resources
58% 50% 59% 36% 37% 40%
INSTITUTIONAL INVESTORS IN ALTERNATIVE ASSETS BY TARGET ALLOCATION TO EACH ASSET CLASS

(AS A % OF AUM)
Private Equity
Less than 5%
Hedge Funds
5-9.9%
Real Estate
10-14.9%
Infrastructure
15-19.9%
Private Debt
20% or More
Natural Resources
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Proportion of Investors
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1. ALTERNATIVE ASSETS
PERCEPTION AND
EXPECTATIONS
INSTITUTIONAL INVESTORS’ GENERAL PERCEPTION OF INSTITUTIONAL INVESTOR VIEWS ON ALTERNATIVE
ALTERNATIVE ASSET CLASSES ASSETS PERFORMANCE
Exceeded
Private Equity
Performance Expectations over

Venture Capital
Previous 12 Months
Met
Hedge Funds
Real Estate
Infrastructure Fallen Short
Private Debt Worse About the Same Better
Performance Expectations for Next 12 Months

Natural Resources
Source: Preqin Investor Interviews, December 2017
Positive Neutral Negative
INSTITUTIONAL INVESTORS’ PLANS FOR THE COMING YEAR

Invest Less Capital than in Past 12 Months ▼ Invest More Capital than in Past 12 Months ▲
8% Private Equity 37%

26% Venture Capital 23%
27% Hedge Funds 27%
16% Real Estate 26%
10% Infrastructure 39%
10% Private Debt 42%
19% Natural Resources 11%
INSTITUTIONAL INVESTORS’ PLANS FOR THE LONGER TERM

Reduce Allocation ▼ Increase Allocation ▲

25% Hedge Funds 19%
11% Real Estate 32%
2% Private Debt 54%
5
FUND SELECTION AND

MARKETING
INSTITUTIONAL INVESTOR VIEWS ON THE DIFFICULT OF SOURCING INVESTMENT OPPORTUNITIES COMPARED TO 12 MONTHS AGO
Harder to Find Attractive Investment Easier to Find Attractive Investment

Opportunities Opportunities

38% Hedge Funds 10%
49% Real Estate 1%
28% Private Debt 7%
AVERAGE NUMBER OF COMMITMENTS INSTITUTIONAL INVESTORS MAKE PER YEAR
Private Equity Venture Capital Hedge Funds Real Estate Infrastructure Private Debt Natural Resources
3.5 1.7 2.4 1.9 1.7 2.2 1.5

AVERAGE NUMBER OF MARKETING DOCUMENTS INSTITUTIONAL INVESTORS RECEIVE PER MONTH
Private Equity Venture Capital Hedge Funds Real Estate Infrastructure Private Debt Natural Resources
18 20
15 15
12 12
8
INSTITUTIONAL INVESTORS VIEWS ON THE FREQUENCY WITH WHICH MARKETING DOCUMENTS MEET THEIR NEEDS
Private Equity
Always Meet
Venture Capital Needs
Hedge Funds Mostly Meet

Needs
Real Estate
Mostly Fail to
Infrastructure Meet Needs
Private Debt Always Fail to
Natural Resources Meet Needs
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Proportion of Respondents

1. ALTERNATIVE ASSETS
FUND TERMS AND

ALIGNMENT OF INTERESTS
PROPORTION OF INSTITUTIONAL INVESTORS THAT FEEL FUND MANAGER AND INVESTOR INTERESTS ARE PROPERLY ALIGNED
Natural
Private Equity Venture Capital Hedge Funds Real Estate Infrastructure Private Debt
Resources
74 %
62
%
40
%
78 %
81 %
82 %
71 %
INSTITUTIONAL INVESTOR VIEWS ON CHANGES IN PREVAILING FUND TERMS OVER THE PAST 12 MONTHS
Change in Favour of Fund Manager Change in Favour of Investor

0% Hedge Funds 55%
9% Real Estate 28%
12% Private Debt 33%
FREQUENCY WITH WHICH INSTITUTIONAL INVESTORS HAVE DECIDED NOT TO INVEST IN A FUND DUE TO THE PROPOSED
TERMS AND CONDITIONS
Private Equity
Venture Capital
Frequently
Hedge Funds
Real Estate Occasionally

Infrastructure
Never
Private Debt
Natural Resources
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
7
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EVOLVING AND SO ARE WE.
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2018.
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SECTION TWO:
PRIVATE EQUITY
APPETITE PERSISTS DESPITE

VALUATIONS CONCERNS
P reqin’s survey results show that entry
prices for assets have been at the
forefront of investors’ minds for the past
having on deal flow, and the future impact
it may have on returns appears to have
dented investor sentiment. Investors
capital. Ninety-five percent of investors
feel that the performance of their private
equity portfolios met or exceeded their
three years; however, the level of concern surveyed by Preqin in December 2017 expectations in the past 12 months, and
has now reached new heights – 88% of LPs were less positive about private equity 92% of LPs are looking to deploy the same
cited valuations as the biggest challenge than 12 months prior: 63% of respondents amount if not more capital in 2018 than
facing the private equity industry in 2018. had a positive view of private equity in they did in 2017. Furthermore, 80% of
With dry powder levels now exceeding December 2017, compared to 84% in those planning to make a commitment are
$1tn, bull market conditions and increased December 2016 – the smallest proportion looking to do so in Q1 2018. The longer-
competition from direct investors, high in three years. term outlook is also very positive: 53%
pricing looks set to continue for the of LPs plan to increase their allocation to
foreseeable future. Despite the challenges and concerns that private equity over the long term, up from
investors recognize in the asset class, 48% of respondents in December 2016.
While high pricing is common to most the prospects for private equity look
asset classes today, there is clearly unease strong in 2018 as investors seek the most
among investors over the impact it is attractive risk-adjusted returns for their
KEY ISSUES INVESTOR SATISFACTION FUTURE PLANS
88%
of investors consider valuations to be
63%
of investors have a positive perception
37%
of investors plan to commit more capital
one of the key issues facing the private of private equity, down from 84% in to private equity funds over the next 12
equity industry in 2018. December 2016. months than the past 12 months.
50%
of investors believe it is currently
38%
of investors reported that their private
53%
of investors plan to increase their
harder to find attractive investment equity investments over the past three allocation to private equity over the long
opportunities than 12 months ago. years had exceeded expectations. term.

2. PRIVATE EQUITY
SATISFACTION WITH
PRIVATE EQUITY
A mong investors interviewed by Preqin
in December 2017, 63% reported
a positive view of the asset class, a
Despite this, the majority (69%) of
investors felt that their fund investments
had met their expectations over the past
Current high valuations and the potential
impact on private equity performance
appears to have lowered investors’ return
substantial decrease from 84% of those 12 months, with a further 26% stating expectations: the proportion of LPs with
surveyed in December 2016 and the that their expectations were exceeded, up return expectations of 4.1% or more above
smallest proportion in three years (Fig. from 24% of those surveyed at the end of public markets has decreased by nine
2.1). This is perhaps unsurprising given 2016 (Fig. 2.2). The same trend is apparent percentage points from 2016 (Fig. 2.4). At
that the survey results also showed that over a three-year timeframe but with an the same time, there has been an increase
40% of LPs feel portfolio companies are even larger proportion (38%) of investors in the proportion of investors expecting
currently overpriced and that a market reporting that their expectations had been returns to either be the same as public
correction is imminent or likely in the next exceeded (Fig. 2.3). markets or only +2% more.
12 months.
Fig. 2.2: Extent to Which Investors Feel Their Private Equity

Fig. 2.1: Investors’ General Perception of the Private Equity Investments Have Lived up to Expectations over the Past 12
Industry, 2015 - 2017 Months, 2012 - 2017
100% 100%
11% 13%
90% 90% 17%
24% 26%
30%
80% 80%
Exceeded
70% 63% Positive 70%
65% Expectations
60% 60%
84% Neutral
74% Met
50% 50% 77%
75% Expectations
Negative
40% 40% 71% 69%
64%
Fallen Short of
30% 30%
Expectations
20% 29% 30% 20%
10% 13% 10%

15% 11%
6% 7% 8% 6% 5% 5%
0% 3% 0%
Dec-15 Dec-16 Dec-17 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17
Source: Preqin Investor Interviews, December 2015 - 2017 Source: Preqin Investor Interviews, December 2012 - 2017
Fig. 2.3: Extent to Which Investors Feel Their Private Equity Fig. 2.4: Investor Return Expectations for Their Private Equity
Investments Have Lived up to Expectations over the Past Three Portfolios in the Next 12 Months Compared to the Previous 12
Years Months, 2012 - 2017
100%
90%
5%
80% 37% 40% 40% Public Market
43%
49% +4.1% and over

54%
Exceeded 70%
Expectations Public Market
38% 60%
+2.1% to 4%
Met Expectations 50%
37% 35% Public Market
40% 49%
30% +2%
43%
Fallen Short of 30% 29%
57% Expectations Same as Public
20% Market
16%
9% 18% 15%
10% 12%
11%
8% 5% 6% 9%
0% 2% 3%
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17
Source: Preqin Investor Interviews, December 2017 Source: Preqin Investor Interviews, December 2012 - 2017
11
INVESTOR ACTIVITY IN 2018

D espite the challenges facing investors
in 2018, the majority remain
committed to the asset class. Fifty-five
The prospect of further growth in private
equity over the longer term is strong: 53%
of investors surveyed in December 2017
commitment in H1 2018 (Fig. 2.7). With
distributions continuing to outstrip capital
calls, investors will need to re-invest
percent of those surveyed plan to invest plan to increase their allocation to the significant amounts of capital back into
the same amount of capital in private asset class over the long term, the largest the asset class in order to meet target
equity funds as they did in 2017, while a proportion in the period shown (Fig. 2.6). allocations. However, 54% of LPs are
further 37% intend to commit more capital There has also been a corresponding looking to maintain the same number of
than they did in the past year (Fig. 2.5). decrease in the proportion of investors GP relationships in the next two years,
Just 8% of respondents plan to invest less that plan to reduce their allocation while a further 11% plan to decrease the
capital in 2018 – down three percentage over the long term, down to just 4% of number of managers in their portfolio,
points from the corresponding proportion respondents in December 2017. in line with the trend of capital being
of investors surveyed at the end of 2016. concentrated with fewer, more established
Ninety-two percent of surveyed investors players (Fig. 2.8).
are looking to make their next fund
Fig. 2.5: Investors’ Expected Capital Commitments to Private

Equity Funds in the Next 12 Months Compared to the Previous Fig. 2.6: Investors’ Intentions for Their Private Equity Allocations
12 Months, 2015 - 2017 in the Longer Term, 2012 - 2017
100% 100%
90% 90%
37% 33% 36%
80% 43% 40% 80% 39%
48%
52% 53%
70% More Capital 70% Increase
Allocation
60% 60%
Same Amount Maintain
50% of Capital 50%
Allocation
48%
40% Less Capital 40% 49%
45% 49% 55% 53% Decrease
30% 30% 46%
43% 43% Allocation
20% 20%
10% 10% 19%

13% 16%
11% 8% 8% 6% 6% 4%
0% 0%
Dec-15 Dec-16 Dec-17 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17
Fig. 2.8: Investors’ Expected Change in the Number of Fund

Fig. 2.7: Timeframe for Investors’ Next Intended Commitment to Managers in their Private Equity Portfolios in the Next Two
a Private Equity Fund Years
7% 11%
1%
Q1 2018
12% More Fund
35% Managers
Q2 2018
Q3 2018 Same Number of

Fund Managers
Q4 2018
Fewer Fund
2019 or Managers
Later 54%
80%
Source: Preqin Investor Interviews, December 2017 Source: Preqin Investor Interviews, December 2017

2. PRIVATE EQUITY
KEY ISSUES IN 2018

H igh valuations remain the main issue
that investors feel will most affect
the private equity asset class in 2018, as
Fig. 2.9: Investor Views on the Key Issues for Private Equity in 2018
Valuations 88%
identified by 88% of respondents (Fig. Exit Environment 40%
2.9) – up 18 percentage points compared Fees 39%
to the prior year’s survey. Investors’
Deal Flow 30%
pricing concerns combined with record
dry powder levels are making it more Volatility/Uncertainty in Global Markets 18%
difficult for GPs to deploy capital and Performance 16%
a significant proportion (30%) of LPs
Availability/Pricing of Debt Financing 10%
are concerned over future deal flow;
Governance 10%
half of respondents believe it is now
harder to identify attractive investment Transparency 9%
opportunities compared to 12 months Regulation 9%
ago – up five percentage points from 2016
(Fig. 2.10). The exit environment and fees 0% 20% 40% 60% 80% 100%
also continue to weigh on investors’ minds, Proportion of Respondents

identified by around two-fifths of investors Source: Preqin Investor Interviews, December 2017
as key issues. However, investors based

in Europe, Asia and Rest of World believe 2.11). However, over the longer term, the are undecided as to when a correction
fees will be a bigger issue for the market in outlook is not as positive, with over a third will occur – the largest proportion (41%)
2018 than the slow exit environment. (34%) of respondents believing valuations believe that it is still more than 12 months
will produce lower returns. In terms of away.
Encouragingly, over the next 12 months, where we are in the current cycle, 81%
72% of investors surveyed feel that current of investors feel that assets are currently Equity market movements have had the
valuations for portfolio companies will overvalued and that a market correction biggest impact on investors’ portfolios in
lead to similar or higher returns (Fig. is likely (Fig. 2.12); however, respondents the past 12 months and will do so again
Investors’ Top Five Issues for Private Equity in 2018 by Investor Location:
EUROPE
Valuations
NORTH AMERICA Fees

ASIA &
Valuations Exit Environment REST OF WORLD
Exit Environment Deal Flow Valuations
Fees Volatility/Uncertainty in Fees
Global Markets
Deal Flow Exit Environment
Performance Deal Flow
Volatility/Uncertainty in
Global Markets
13
in 2018, as cited by 60% and 64% of Fig. 2.10: Investor Views on the Difficulty of Identifying Attractive Investment
respondents respectively (Fig. 2.13). Low Opportunities Compared to 12 Months Ago, 2016 vs. 2017
interest rates have also had a significant 100% 3%
5%
impact on LPs’ portfolios in 2017, as cited
90%
by nearly half (47%) of respondents.
However, with the Federal Reserve raising 80%
48%
interest rates three times by the end of 70% 50%
2017, and the UK following suit, there is a Easier
60%
significant proportion (34%) of investors
50% No Change
that feel the possibility of interest rate
rises will have a significant impact on 40%
More Difficult
portfolios in the coming year.
30%
50%
20% 45%
10%
0%
Dec-16 Dec-17
Source: Preqin Investor Interviews, December 2016 - 2017
Fig. 2.11: Investor Views on How Current Valuations for Portfolio

Companies Will Impact Private Equity Returns in the Next 12 Fig. 2.12: Investor Views on Where Private Equity Is in the
Months and Longer Term Current Market Cycle
100% 45% 41%
40%
90% 35%
27% 25%
29%
Proportion of
Respondents
80% 30%
25%
70% 20%
Higher Returns 14%
15% 11%
60%
10%
41% Similar Returns 3% 3%
50% 45% 5%
0%
40%
Correction Likely within

Considerable Room for
Correction More than 12

Some Room for Further
Assets Fairly Valued
Correction Imminent
Lower Returns
Assets Overvalued,
Assets Undervalued,
Assets Undervalued,
Assets Overvalued,
Further Price Rises
Assets Overvalued,
Next 12 Months
30%
Months Away
Price Rises
20%
34%
28%
10%
0%
Next 12 Months Longer Term
Fig. 2.13: Investor Views on the Macroeconomic Factors that Had the Biggest Impact on Their Private Equity Portfolios in 2017 vs.
Predictions for 2018
70% 64%
60%
60%
50% 47% Biggest Impact
in 2017
40% 34%
30% 23%
21% 20% 20% Predictions for
20% 18% 14%
12% 12% 2018
9% 9% 9% 9% 9% 7%
10% 4% 3% 3% 4% 1% 3%
0%
Possibility of Interest
Geopolitical Landscape
Equity Market
Commodity Price
MiFID II
US Regulatory Reform
Unwinding of Central
US Trade Policy
Currency Market
US Domestic Policy
Low Interest Rates
UK-EU Brexit
Negotiations
Bank Balance Sheets

Movements
Movements
Movements
Rate Rises
Proposals

2. PRIVATE EQUITY
EXPECTATIONS AND
OPPORTUNITIES
N early two-thirds (65%) of investors
are expecting the same level of
returns from their private equity portfolios
percentage points from just 18% in 2016 to
28% in 2017.
in terms of allocations, emerging markets
are proving to be of increasing interest to
investors: 30% of LPs plan to increase their
in the coming year as in 2017 (Fig. 2.14). Investors still believe that North America allocation to these regions in the next 12
However, 20% of respondents believe presents the best opportunities in private months. This is a significant increase from
their portfolios will deliver lower returns equity, as cited by 69% of those surveyed, 20% of investors surveyed in December
compared to 15% of investors expecting compared with 61% in 2016 (Fig. 2.16). 2016.
higher returns over the coming year. Over half (51%) of LPs believe Europe
presents the best opportunities, while Within emerging markets, over half
Small to mid-market buyout funds significantly more investors view Asia (51%) of investors surveyed believe
continue to present the best opportunities, favourably than did so the previous year China specifically is presenting the best
according to 49% of LPs surveyed; (32% vs. 20% respectively). opportunities at present; however, there
however, this is a significantly smaller has also been a notable increase in the
proportion than in previous years (Fig. Although the same proportion of LPs proportion of LPs with a preference for
2.15). The proportion of LPs favouring believe emerging markets present the Central & Eastern Europe in the past year
growth fund investments has risen by 10 best opportunities as at the end of 2016, (Fig. 2.17).
Fig. 2.14: Investor Return Expectations for Their Private Equity

Investments in the Next 12 Months Compared to the Previous Fig. 2.15: Fund Types that Investors View as Presenting the Best
12 Months Opportunities, 2015 - 2017
61%
Small to Mid-Market Buyout 58%
49%
16%
15% Growth 18%
20% 28%
21%
Large to Mega Buyout 24%
Will Perform Better 21%
8%
Fund of Funds 16%
18%
Will Perform About 24%
the Same Venture Capital 28%
17%
13%
Will Perform Worse Secondaries 14%
17%
4%
Other 7%
19%
65% 0% 20% 40% 60% 80%

Dec-15 Dec-16 Dec-17
Fig. 2.16: Regions that Investors View as Presenting the Best Fig. 2.17: Countries and Regions within Emerging Markets that
Opportunities, 2016 vs. 2017 Investors View as Presenting the Best Opportunities, 2015 - 2017
80%
Emerging Asia
69%
70% China
61%
60% Latin America

51%
50% India
44% Dec-16
40% Brazil
32% Dec-17 Central & Eastern Europe
30%
20% Russia
20% 18%18%
Middle East
10%
Africa
0%
0% 20% 40% 60%
North America Europe Asia Emerging
Markets Proportion of Respondents
Region Presenting Best Opportunities Dec-15 Dec-16 Dec-17

15
FUND TERMS AND

T he alignment of interests between GPs
and LPs is an important aspect of their
relationship, and is intrinsically related
months. Similar proportions of investors
surveyed have seen changes in fund terms
in favour of LPs (29%) and GPs (27%), with
transparency (45%), the hurdle rate (32%)
and how performance fees are charged
(29%).
to fund terms and conditions. Across the the largest proportion (44%) experiencing
private equity universe, a significant 74% no change at all (Fig. 2.19). Fund terms and conditions proposed by
of investors surveyed believe that GP and GPs have a heavy bearing on whether
LP interests are properly aligned, up from Nearly a third (32%) of investors surveyed an LP decides to invest in a fund, as
66% in 2016 (Fig. 2.18). saw some changes in the management demonstrated by Fig. 2.21. One-quarter of
fees of private equity funds over 2017; LPs have frequently decided not to invest
Although investors still see many ways in however, the majority (63%) of LPs believe in a fund as a result of the proposed terms
which fund terms and conditions could management fees are an area where and conditions, while a further 64% have
improve the alignment of their interests alignment with GPs can still be improved occasionally been deterred from making
with GPs’, there have been some changes (Fig. 2.20). Other areas in which LPs want an investment.
in prevailing fund terms over the past 12 GPs to address key issues are fund-level
Fig. 2.18: Extent to Which Investors Believe that Fund Manager Fig. 2.19: Proportion of Investors that Have Seen a Change in
and Investor Interests Are Properly Aligned, 2013 - 2017 Prevailing Fund Terms and Conditions over the Past 12 Months
100%
90% Significant Change in

3% 4%
80% Favour of Investor
Agree that
70% 24% Slight Change in Favour
66% Interests Are 25%
71% 70% 74% of Investor
60% 76% Properly Aligned
50% No Change
40% Disagree that

Interests Are
30% Slight Change in Favour
Properly Aligned
of Fund Manager
20%
35%
29% 30% 26% Significant Change in
10% 24%
44% Favour of Fund Manager
0%
Dec-13 Dec-14 Dec-15 Dec-16 Dec-17
Source: Preqin Investor Interviews, December 2013 - 2017 Source: Preqin Investor Interviews, December 2017
Fig. 2.20: Areas in Which Investors Have Seen a Change in

Prevailing Fund Terms and Conditions over the Past 12 Months Fig. 2.21: Frequency with Which Investors Have Decided Not to
and Where They Believe Alignment Can Be Improved Invest in a Fund Due to the Proposed Terms and Conditions
70%
63%
60% Have Seen
50% 45% Changes in Past 10%
40% 12 Months
32% 32% 25% Frequently Decided
29% 26% 26%
30% 25% 21% Believe Not to Invest
20% 17%
11% 12% 11% Alignment Can
10% 6% 8%
3% Be Improved Occasionally Decided
0% Not to Invest
Increased Transparency
Lock-up Period
Performance Fees
Performance Fees - How

Management Fees
GP Commitment to Fund
Hurdle Rate
They Are Calculated

They Are Charged
Never Decided Not

- Amount
at Fund Level
to Invest
64%

2. PRIVATE EQUITY
HOW INVESTORS SOURCE AND

SELECT PRIVATE EQUITY FUNDS
I n our December 2017 interviews with over 250 institutional investors, 50% of respondents revealed that they found it more difficult to
identify attractive private equity fund opportunities in 2017 than in 2016. With this in mind, using investors’ responses and data from
our online platform, we examine in more detail the processes that investors employ to source and screen private equity funds.
KEY STATS: AVERAGE SCREENING PROCESS FOR PRIVATE EQUITY FUNDS
METHODS USED BY INVESTORS TO SOURCE FUNDS:

■■ Mix of internal sourcing and direct 2,296
Private Equity
external approaches (73%)
■■ Only internal sourcing (21%)
Funds in Market
■■ Only direct external approaches (6%)
LEADING FACTORS THAT RESULT IN INVESTORS

REMOVING A FUND FROM THEIR SCREENING LIST:
88
Lack of team track record (62%)
88
Unfavourable fund terms (56%)
88
Below-average team track record (52%) Investors Screen
145
MOST IMPORTANT FACTORS INVESTORS ASSESS
WHEN SELECTING NEW FUNDS:
Private Equity
Funds Each Year
15
of These Funds
99
Successful team track record (80%) Reach Second-
99
Experienced team (78%) Round
99
Successful firm track record (58%) Screening
Investors
Commit to
4
Funds Each
Year
MARKETING MATERIALS FAIL TO MEET THE NEEDS OF 33% OF INVESTORS – WHY?
Insufficient information on track

record 57%
Insufficient information on
investment strategy 54%
Insufficient information on fees/fund

terms 35%
Insufficient information on team

24%
Past performance data not following

20%
appropriate reporting guidelines
17
SAMPLE PRIVATE EQUITY

INVESTORS TO WATCH IN 2018
6
3 5
4
1
2
7/8
1 2 3
LOS ANGELES COUNTY EMPLOYEES’ EMPLOYEES’ RETIREMENT SYSTEM OF STATE FARM
RETIREMENT ASSOCIATION TEXAS Type: Insurance Company
Type: Public Pension Fund Type: Public Pension Fund Location: Bloomington, IL, US
Location: Pasadena, CA, US Location: Austin, TX, US Total Assets: $250bn
Total Assets: $55bn Total Assets: $28bn Target PE Allocation: 4.0%
Current/Target PE Allocation: 9.4%/10.0% Current/Target PE Allocation: 12.5%/13.0% Plans to commit between $650mn and
Intends to commit between $1.2bn and Will commit between $600mn and $1.45bn $850mn across 10-12 funds, targeting
$1.8bn to buyout, special situations and across 17-29 funds, focusing on buyout, North America-focused middle-market
venture capital vehicles. growth and venture capital. buyout funds.
4 5 6
UMR COREM TALANX ASSET MANAGEMENT AALTO UNIVERSITY ENDOWMENT
Type: Public Pension Fund Type: Asset Manager Type: Endowment Plan
Location: Nantes, France Location: Cologne, Germany Location: Espoo, Finland
Total Assets: €10bn Total Assets: €130bn Total Assets: €1.1bn
Current/Target PE Allocation: 2.5%/3.0% Current PE Allocation: 2.3% Target PE Allocation: 10.0%
Will invest in three or four funds, Will seek to make new commitments Plans to commit €38mn across three funds,
committing €20mn to each fund, targeting over the next 12 months, focusing on targeting Europe- and North America-
buyout, fund of funds, turnaround and Europe, North America and Asia. Is looking focused buyout funds.
early stage investments. to commit to 10-15 funds, investing
approximately €400mn.
7 8 9
ENSPIRE CAPITAL LEONIE HILL CAPITAL MLC
Type: Family Office Type: Family Office Type: Asset Manager
Location: Singapore Location: Singapore Location: Sydney, Australia
Total Assets: $150mn Total Assets: $2.3bn Total Assets: AUD 100bn
Current PE Allocation: 50.0% Current PE Allocation: 70.0% Current PE Allocation: 5.0%
Will invest between $3mn and $5mn in one Plans to target 10 funds with an average Intends to commit between AUD 400mn
fund, focusing on investments in Southeast commitment size of $90-100mn per fund and AUD 500mn across 10-15 funds on a
Asia. with a focus on buyout, venture capital and global basis.
growth vehicles on a global basis.

SECTION THREE:
VENTURE CAPITAL
TOUGH COMPETITION BUT

HEALTHY APPETITE
V enture capital continues to grow as a
prominent private equity strategy and
to some it is considered an asset class on
Regardless, 85% of investors interviewed
by Preqin in December 2017 plan to either
maintain or increase their allocation
commitments, as 80% of investors
surveyed by Preqin are targeting the
region in 2018. Moreover, 13% of investors
its own. High returns and diversification to the strategy over the long term. The plan to increase their North American
potential have increasingly attracted majority (65%) of investors surveyed are venture capital portfolio allocations in the
institutional investors and capital to looking to form at least one new manager next 12 months.
the space; however, as competition relationship in the next 12 months, a
grows within the industry, a sizeable positive statistic for first-time managers
proportion (40%) of investors are finding planning to enter this competitive space.
it increasingly difficult to identify attractive
opportunities. Portfolio company North America-focused venture capital
valuations, the current exit environment fundraising finished strong in 2017 with
and fees are at the forefront of investors’ $52bn in capital raised. The region will
concerns in 2018. likely continue to see growth in capital
INVESTOR SATISFACTION CURRENT ENVIRONMENT LOOKING FORWARD
40%
of respondents are finding it more
41%
of investors target venture capital
26%
of investors plan to increase their
difficult to identify attractive returns in excess of +4.1% versus public venture capital allocations in the long
opportunities than 12 months ago. markets. term.
71%
of investors stated their venture capital
$52bn
Amount of capital raised by North
63%
of investors plan to maintain or increase
investments have met or exceeded America-focused venture capital funds their venture capital allocation over the
expectations in the past 12 months. closed in 2017. long term.
62%
of respondents agree that fund manager
70%
of investors believe valuations are a key
35%
of investors plan to make seven or more
and investor interests are aligned. issue facing venture capital in 2018. commitments in the next 12 months.

3. VENTURE CAPITAL
SATISFACTION WITH
VENTURE CAPITAL
T he results of our December 2017
survey suggest that the general
opinion of venture capital has slightly
portfolios exceeded expectations dropped
from 17% to 8% in comparison to six
months prior, and a marginally greater
investors’ perception of portfolio
performance in both the past 12 months
and past three years is more negative in
improved among institutional investors proportion of investors were disappointed comparison to June 2017.
interviewed in comparison to the previous by the performance of their venture capital
year, as seen in Fig. 3.1. Nevertheless, the investments than in June 2017 (29% vs. Seventy-eight percent of respondents
proportion of investors with a negative 24% respectively). are equally as confident in the ability
perception of the industry remains at of venture capital to achieve portfolio
nearly a quarter (23%). Investors appear to be more satisfied objectives as they were when surveyed in
with venture capital performance over June 2017. Only 3% of investors now feel
The majority (71%) of investors reported the longer term. Almost 3x as many more confident in the asset class, while
that their venture capital portfolios investors stated that their investments had 19% are less confident (Fig. 3.4), likely
performed as expected or better over exceeded their expectations over the past a result of the growing concerns over
the past 12 months (Fig. 3.2). However, three years versus the past 12 months valuations and volatility in the market.
the proportion of investors that felt their (22% vs. 8% respectively). Nevertheless,
Fig. 3.2: Extent to Which Investors Feel Their Venture Capital

Fig. 3.1: Investors’ General Perception of the Venture Capital Investments Have Lived up to Expectations over the Past 12
Industry, June vs. December 2017 Months, June vs. December 2017
100% 100%
8%
90% 90% 17%
30% 34%
80% 80%
70% 70% Exceeded

Positive Expectations
60% 60% 63%
Neutral 59% Met
50% 50%
47% Expectations
43%
40% Negative 40%
Fallen Short of
30% 30%
Expectations
20% 20%
24% 29%
10% 23% 23% 10%
0% 0%
Jun-17 Dec-17 Jun-17 Dec-17
Source: Preqin Investor Interviews, June - December 2017 Source: Preqin Investor Interviews, June - December 2017
Fig. 3.3: Extent to Which Investors Feel Their Venture Capital Fig. 3.4: Investors’ Change in Confidence in the Ability of Venture
Investments Have Lived up to Expectations over the Past Three Capital to Achieve Portfolio Objectives over the Past 12 Months,
Years, June vs. December 2017 June vs. December 2017
100% 100% 3%
4%
90% 22% 90%
32%
80% 80%
Exceeded
70% 70% Increased
Expectations
Confidence
60% 60% 74% 78%
49% Met
No Change
50% Expectations 50%
45%
40% 40%
Fallen Short of Reduced
30% Expectations 30% Confidence
20% 20%
29%
10% 23% 10% 21% 19%
0% 0%
21

O ver the course of the next year, 74%
of investors expect to commit the
same amount of capital or more capital
with active venture capital mandates plan
to spread their investments across five
or more vehicles in the next 12 months,
venture capital funds in the next 12
months, and a further 36% are looking to
commit $100-499mn (Fig. 3.8). While just
to venture capital funds in the next year, with 35% looking to make seven or more 9% of investors are targeting investments
while 26% intend to commit less (Fig. 3.5). commitments (Fig. 3.7). Furthermore, 65% of more than $500mn, the aggregate
of those surveyed are actively looking to capital committed by this small group
Taking a longer-term view, 85% of form new manager relationships in the could exceed the other 91% of investors’
respondents plan to increase or maintain next 12 months, with an additional 14% aggregate commitments in the year ahead.
their allocations to the asset class over open to considering commitments to new
the next three years, and just 16% plan to managers.
decrease allocations, almost on par with
those surveyed six months ago (Fig. 3.6). More than half (55%) of investors intend
The largest proportion (56%) of investors to commit $1-99mn in fresh capital to
Fig. 3.5: Investors’ Expected Capital Commitments to Venture

Capital Funds in the Next 12 Months Compared to the Previous Fig. 3.6: Investors’ Intentions for Their Venture Capital
12 Months, June vs. December 2017 Allocations in the Longer Term, June vs. December 2017
100% 100%
90% 16% 90%

23% 26%
29%
80% 80%
Increase
70% More Capital 70%
Allocation
60% 47% 60%
51% Same Amount Maintain
50% 50%
of Capital Allocation
56% 59%
40% 40%
Less Capital
Decrease
30% 30% Allocation
20% 37% 20%
26%
10% 10%
15% 16%
0% 0%
Fig. 3.7: Number of Venture Capital Fund Commitments Fig. 3.8: Amount of Fresh Capital Investors Plan to Invest in
Investors Plan to Make over the Next 12 Months Venture Capital Funds over the Next 12 Months
23%
1-2
35% 19% 21% 15% 36% 4% 5%
3-4
5-6
7 or More
21%
0% 20% 40% 60% 80% 100%
21%
$1-19mn $20-49mn $50-99mn
$100-499mn $500-999mn $1bn or More
Source: Preqin Venture Capital Online Source: Preqin Venture Capital Online

3. VENTURE CAPITAL
KEY ISSUES IN 2018

A s seen in Fig. 3.10, 40% of venture
capital investors interviewed have
found it more difficult to find attractive
Fig. 3.9: Investor Views on the Key Issues for Venture Capital in 2017 vs. 2018
Valuations
Exit Environment
investment opportunities over the past
Fees
year, an improvement from 58% in June
Deal Flow
2017. Most investors (60%) reported no Performance
change in the level of difficulty involved in Volatility/Uncertainty in Global Markets
identifying attractive opportunities. Governance
Transparency
Portfolio company valuations remains the Regulation
key issue facing venture capital for the Perception of Industry by Public
majority (70%) of investors interviewed, Availability/Pricing of Debt Financing
although this proportion has declined Interest Rates
slightly from June 2017 (Fig. 3.9). The
0% 20% 40% 60% 80%
state of the exit environment remains the
second most prominent issue, cited by Proportion of Respondents
43% of investors in December 2017 versus Jun-17 Dec-17

51% in June 2017. Source: Preqin Investor Interviews, June - December 2017
Investors’ views on transparency and fees a key issue in December 2017 compared
in the industry have remained relatively with 45% in June 2017. Despite this, only INVESTOR VIEWS ON THE ALIGNMENT
unchanged over the past six months, 9% of respondents expect better returns in OF FUND MANAGER AND INVESTOR
INTERESTS
representing consistent issues in the the next year, compared with 16% in June
industry. Nearly 40% of investors do not 2017 (Fig. 3.11). Two-thirds of investors
feel that interests are aligned between believe returns will remain about the
fund managers and investors, and when same, while a quarter believe that returns 38%
asked in what areas the alignment could will be worse in 2018 compared to the past
be improved, 63% cited fees and 46% cited 12 months.
62%
transparency at fund level.
The most notable change in opinion is in

reference to venture capital performance: Agree Interests Are Aligned
Disagree Interests Are Aligned
20% of respondents cited performance as
Fig. 3.10: Investor Views on the Difficulty of Identifying Fig. 3.11: Investor Return Expectations for Their Venture Capital
Attractive Venture Capital Investment Opportunities Compared Investments in the Next 12 Months Compared to the Past 12
to 12 Months Ago, June vs. December 2017 Months, June vs. December 2017
100% 100%
9%
90% 90% 16%
80% 42% 80%

Will Perform
70% 60% 70%
Easier Better
60% 60% 47%
66%
Will Perform
50% No Change 50%
About the Same
40% More Difficult 40%
Will Perform
30% 58% 30% Worse
20% 40% 20% 37%

10% 10% 25%
0% 0%
23
STRATEGIES AND
GEOGRAPHIES TARGETED
E arly stage strategies remain the most
attractive to venture capital investors
moving into 2018, as reported by 32%
as seen in Fig. 3.13. North America-focused
funds remain the most likely recipients of
commitments from abroad: 75% and 47%
and Europe-focused ($16bn) venture
capital, fundraising activity in 2017 dipped
slightly for both regions: 280 North
of those interviewed (Fig. 3.12). General of allocators based in Europe and Asia America-focused funds closed on an
venture capital and growth funds follow respectively are seeking North American aggregate $52bn and 86 Europe-focused
closely behind, as targeted by 25% and exposure. Venture capital vehicles funds collectively secured $13bn (Fig. 3.14).
30% of investors respectively. As expected, primarily focused on investments in Asia However, 80% of investors surveyed by
the niche strategy of venture debt is are sought by the smallest proportions of Preqin view North America as presenting
targeted by the smallest proportion (5%) of investors based in both Europe (18%) and the best venture capital opportunities
respondents. North America (22%). in the coming year, while 52% favour
European opportunities (Fig. 3.15).
Investors across the globe typically commit Following 2016’s record fundraising year
to funds targeting their domestic regions, for both North America-focused ($56bn)
Fig. 3.12: Fund Types that Investors View as Presenting the Best Fig. 3.13: Regions Targeted by Venture Capital Investors by
Opportunities Investor Location
35% 100%
30% 90%
30%
82%
25% 80% 79%
75%
25%
20% 70% North America-
65%
20% Focused Funds
16% 60%
15%
12% 50% 47% Europe-Focused
10% 40% Funds
40%
5%
5% Asia-Focused
30%
22% Funds
0% 20% 18% 18%
Venture Capital
Venture Debt
Growth
Expansion/
Early Stage
Early Stage:
Late Stage
10%
(All Stages)
Seed
0%
North America Europe Asia
Investor Location
Source: Preqin Investor Interviews, December 2017 Source: Preqin Venture Capital Online
Fig. 3.14: North America- vs. Europe-Focused Venture Capital Fig. 3.15: Regions that Investors View as Presenting the Best
Fundraising, 2014 - 2017 Opportunities
400 90%
351 80%
350 80%
305 300
300 280 2014 70%
250
2015 60%
200 52%
2016 50%
150
102 90 92 2017 40%
100 86 34%
51 53 56 52 30%
50
11 10 16 13
0 20%
No. of Funds Aggregate No. of Funds Aggregate
Closed Capital Raised Closed Capital Raised 10%
($bn) ($bn)
0%
North America Europe North America Europe Asia
Source: Preqin Venture Capital Online Source: Preqin Investor Interviews, December 2017

3. VENTURE CAPITAL
IN FOCUS: INVESTING IN
VENTURE CAPITAL
W hile Preqin includes venture capital
strategies within the context of
private equity, we also join a growing
Fig. 3.16: Venture Capital Investors’ Targeted Returns: Venture Capital vs. Private
Equity Investments
50%
population of investors in acknowledging 45% 43%
41%
the unique characteristics of the space that
40% 37%
allow it to exist as a standalone asset class. 35%
31%
Nearly a fifth (17%) of investors surveyed Venture Capital
30%
at the end of 2017 maintain a separate
25%
allocation for venture capital within their Private Equity
20% 17%
portfolio. 14%
15%
10% 8% 9%
PROPORTION OF INVESTORS THAT
MAINTAIN A SEPARATE VENTURE CAPITAL 5%
ALLOCATION 0%
Same as Public Public Market Public Market Public Market
17% Market +2% +2.1% to 4% +4.1% and
Above
Targeted Returns
83% Fig. 3.17: Venture Capital Investor Views on How Current Valuations for Portfolio
Companies Will Impact Returns in the Next 12 Months and Longer Term: Venture
Capital vs. Private Equity
Maintain Separate Allocation
100%
Do Not Have Separate Allocation
90%
33% 35% 32% 34%
As a result of variations in risk/return 80%

profiles across strategies, investors 70%
typically expect their venture capital 60%
investments to outperform public markets 50%
40% 36% 47% 41%
by a larger margin than their traditional 40%
private equity investments. The majority
30%
(78%) of investors target venture capital
20%
returns in excess of +2.1% versus public 27% 28%
10% 21% 25%
markets, while 74% expect the same from
private equity investments (Fig. 3.16). 0%
Among the 6,800+ active private equity Private Equity - Private Equity - Venture Capital - Venture Capital -
Next 12 Months Longer Term Next 12 Months Longer Term
investors, 68% actively invest in venture
capital. Lower Returns Similar Returns Higher Returns
Current portfolio company valuations
remain a key concern for 70% of investors. equity returns (Fig. 3.17). Forty percent
While the ultimate impact of current of investors predict that private equity
valuation levels on returns has yet to returns in the next 12 months will be
be seen, looking ahead to the next 12 unaffected by current portfolio valuations,
months and beyond, investors expect compared to 47% that believe venture
venture capital returns to be less impacted capital will be unaffected.
by current valuations than private
25
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SECTION FOUR:
HEDGE FUNDS
INVESTORS WARM TO
HEDGE FUNDS IN 2018
O ur latest survey reveals a reversal
of the trends we have seen since
the middle of the decade in regard to
with a turbulent start to 2018, market
volatility looks on the rise, and this
could lead to a better environment for
portfolios of hedge funds, perhaps, in
regard to the twin issues of performance
and fees, it is a case of plus ça change, plus
institutional sentiment surrounding hedge hedge fund performance, as well as c’est la même chose. Performance and fees
funds. In a time when the performance of more capital flowing into hedge funds, have topped investor concerns since the
hedge funds is much improved – hedge particularly those strategies with less start of 2014, and for 2018, this remains
fund returns hit a four-year high in 2017 correlation to equity markets. Although unchanged. Investors are still looking for
– investor sentiment has turned more large proportions of investors surveyed hedge funds to show what they are worth,
positive. In 2017 there was a return to net have indicated that they may reduce their which means successfully navigating
inflows, following fundraising difficulties exposure to the asset class in 2018, we see the choppy waters of 2018’s markets, as
in the latter half of 2015 and 2016, and similarly high levels with plans to put more well as continuing to work to better align
the value of the capital invested by capital to work – in fact, the highest levels interests.
institutional investors has reached record we have recorded since 2013. And there
highs of $2.06tn, as at December 2017. is more positive news in terms of the size Although we may see little change, in
and number of mandates open in 2018. respect to the challenges investors see in
In 2018, there are further signs that The number of open fund searches we the hedge fund sector, we have witnessed
fortunes for hedge funds may continue track has grown 25% since 2017, and the continued evolution in the industry today.
to improve. Our survey results show average size of each mandate has grown Our special feature, ‘Emerging Trends’
that the largest proportion of investors by 40% over the same timeframe. So it on page 36, shows investors’ outlook
believe that equity markets are hitting looks likely more money will fall into the on some of the hot topics in the hedge
the peak of the cycle and as a result are hands of more managers in 2018. fund world today: alternative risk premia,
positioning themselves more defensively cryptocurrencies and artificial intelligence/
going forwards. Whether this turns out However, despite the improved outlook machine learning.
to be true or not, only time will tell, but among investors for their individual
IMPROVING SENTIMENT... ...BUT ISSUES REMAIN LOOKING FORWARD
72%
of investors reported that their hedge
70% / 65%
of investors have cited performance and
27%
of investors are planning to increase
fund investments met or exceeded fees respectively as key issues for the their allocation to hedge funds in 2018,
expectations in 2017, a significant hedge fund industry in 2018. up from 20% the previous year.
improvement from 34% in 2016.
85%
of investors saw an improvement in
55%
of investors surveyed issued a
27%
of investors are looking to scale back
hedge fund management fees in 2017; redemption request in 2017, with their allocation to hedge funds in 2018,
however, 64% want to see further performance over the past three years down from 38% the previous year.
improvement in 2018. cited by 39% as the reason behind this.

4. HEDGE FUNDS
KEY ISSUES IN 2018

P erformance and fees remain at the
centre of investor debate in the hedge
fund industry (Fig. 4.1). While performance
Fig. 4.1: Investor Views on the Key Issues for Hedge Funds in 2018
Performance 70%
remains the key issue for many investors, Fees 65%

as returns continue to improve, the fees Perception of Industry by Public 38%
charged within the hedge fund industry Volatility/Uncertainty in Global Markets 38%
could face greater scrutiny in the coming Governance 21%
years: a smaller proportion of investors
Transparency 19%
interviewed by Preqin in December 2017
Regulation 19%
cited performance as the key issue facing
hedge funds in the next 12 months than Pricing/Valuations 17%
those interviewed 12 months ago. In Portfolio Management 13%
contrast, the proportion citing fees as a Interest Rates 3%
key issue has increased (albeit slightly). Notable Investors Exiting Asset Class 3%
HEDGE FUND REDEMPTIONS IN 2017 0% 20% 40% 60% 80%
Despite many investors witnessing an Proportion of Respondents

improvement in the performance of hedge
funds in 2017, as seen on page 30, the
majority (55%) of respondents issued a institutional hedge fund portfolios. Equity Reserve and People’s Bank of China
hedge fund redemption request in 2017, markets around the world reached record announcing interest rate rises towards the
up eight percentage points from 2016. As highs throughout 2017; therefore, it is end of 2017, a smaller proportion (24%)
to be expected, the leading reasons behind perhaps unsurprising that over half (53%) of investors expect that the low interest
these redemptions centre around the key of respondents felt this had the greatest rate environment will have the biggest
issues investors see in the hedge fund impact on their hedge fund portfolios in impact on their portfolios in 2018 (vs.
market: underperformance relative to a 2017, the largest proportion ahead of low 45% that felt it had the biggest impact in
benchmark or target, as well as the level of interest rates (45%) and the possibility of 2017). Investors perhaps anticipate that
returns not justifying fees (Fig. 4.2). rate rises (38%, Fig. 4.3). this monetary policy will continue in 2018,
with 41% predicting that potential rate
MARKET FACTORS IMPACTING HEDGE Looking forward, the greatest proportion rises will have an impact in 2018. Similarly,
FUND PORTFOLIOS of respondents predict that equity markets more respondents expect the geopolitical
With performance remaining an important will once again have the biggest impact on landscape to have the biggest impact on
issue in the industry, we turned our their hedge fund portfolios. With central their hedge fund portfolios in 2018 than
attention to the market events impacting banks such as the Bank of England, Federal was the case in 2017 (33% vs. 15%).
Fig. 4.3: Investor Views on the Macroeconomic Factors that Had

Fig. 4.2: Reasons Why Investors Issued Redemption Requests in the Biggest Impact on Their Hedge Fund Portfolios in 2017 vs.
2017 Predictions for 2018
30% 60%
53%
25% 48% 45%
25% 50%
41%
20% 40% 38% 35% 35% 33%
15% 15%
15% 30% 24% 24% 22%
10% 20% 20%
10% 9% 20% 18% 15%
7% 7% 7%
5% 11%
10% 8% 7%
5%
0% 0%
US Domestic Policy (e.g.
Tax Reform, Healthcare
Commodity Price
US Trade Policy
Currency Market
Equity Market
Low Interest Rates
Possibility of Interest
Infrastructure Plan)
Bank Balance Sheets
Fund Underperformance
Reducing Size of HF
Fees and Low Returns
Shifting Capital to Other
Shifting Capital to Other

Relative to Fund Target
Change of Strategy
Lack of Transparency
Movements
Reducing Relationships
Areas of Wider Portfolio
within HF Portfolio
Combination of High
Relative to Benchmark
Movements
Movements
Underperformance
with HF Managers
Alternative Assets
Rate Rises
Portfolio
Biggest Impact in 2017 Predictions for 2018

29
INVESTOR OUTLOOK ON
PERFORMANCE
A s 2016 drew to a close, the hedge
fund industry witnessed widespread
levels of investor dissatisfaction:
Fig. 4.4: Extent to Which Investors Feel Their Hedge Fund Investments Have Lived up to
Expectations in the Past 12 Months, 2013 - 2017
100% 3%
two-thirds of investors surveyed in 8% 9% 12%
90% 21%
December 2016 reported that their hedge
fund investments had not met their 80% 31%
Proportion of Respondents Exceeded
performance expectations over the course 70% Expectations
of the year, and nearly half (47%) had 57%
60% 58%
issued redemption requests in 2016. 2017, 60%
Met
however, has seen a resurgence in the 50% Expectations
63%
hedge fund industry: annual returns sit at 40%
a four-year high and investors allocated a 66% Fell Short of
30% Expectations
net $45bn to the industry over the course
of the year. 20%
35% 33% 29%
10%
HEDGE FUND PERFORMANCE IN 2017 16%
Hedge fund performance improved 0%

significantly in 2017, and this has
not gone unnoticed by the investor
community. Nearly three-quarters (72%)
Fig. 4.5: Proportion of Hedge Funds in Investors’ Portfolios that Met Performance
of investors reported that their hedge Expectations in 2017
fund investments met or exceeded
40%
their return expectations in 2017 (Fig.
4.4), a significant increase from Preqin’s 35%
35%
December 2016 interviews (34%) and the
30%
greatest proportion since 2013 (84%),
when the Preqin All-Strategies Hedge 25%
Fund benchmark last generated an annual
return in the double digits. Indeed, two- 20% 19%
17%
thirds of investors reported that returns
15% 13%
from at least half of their hedge fund 11%
investments met their expectations in 10%
6%
2017, with 13% seeing all returns in line
5%
with expectations (Fig. 4.5).
0%
Investors reported the highest levels 0% 1-24% 25-49% 50-74% 75-99% 100%
of satisfaction with the performance of Proportion of Hedge Fund Portfolio
emerging markets-focused and equity Source: Preqin Investor Interviews, December 2017
strategies (Fig. 4.6), with these benchmarks
returning 15.86% and 15.01% respectively challenging for CTA managers throughout
ANNUAL NET RETURNS OF in 2017. Respondents had mixed views 2017 with these vehicles delivering an
HEDGE FUNDS (%), 2013 - 2017 on activist trading styles: nearly half (43%) annual return of 3.24%, eight percentage
reported that activist strategies fell short points lower than the 11.41% return of
of expectations, but a significant 24% felt hedge funds.
12.72
11.41 they performed better than expected.
7.67 While many investors reported that
5.16 Large levels of investors reported their hedge fund investments had met
2.17 dissatisfaction with the performance expectations in 2017, a not insignificant
of CTAs and macro strategies. Macro 29% of investors reported that hedge
strategies generated the second funds had failed to impress. With
lowest return (+5.57%) of any top-level regards to the main driver of this
2013 2014 2015 2016 2017 strategy, while market conditions proved underperformance, investors were largely

4. HEDGE FUNDS
divided: performance relative to their Fig. 4.6: Investor Views on Hedge Fund Portfolio Performance in 2017 Relative to
internal benchmark was cited by 40% Expectations by Strategy
of respondents, as was performance 100% 3%
11% 9% 8% 7% 4% 4%
90% Exceeded
relative to fees (29%) and returns in light 27% 26% 24% 20%
80% Expectations
of the extended and continued strong 70% 46% 49% 54%
performance of equity markets (24%), as 60% 33% 63%
67% 68% 69% Met
50% 50% 50% 59%
seen below. Expectations
40%
30%
TOP THREE REASONS WHY HEDGE 43% 50% 47% 43%
20% Fell Short of
FUNDS FAILED TO MEET INVESTORS’ 23% 24% 30%
10% 21% 22% 23% 22% Expectations
EXPECTATIONS IN 2017 0%
Equity Strategies
Credit Strategies
Relative Value Strategies

Activist
Multi-Strategy
Discretionary CTA
Emerging Markets
Event Driven Strategies
Macro Strategies
Fund of Hedge Funds
Systematic CTA
40%
29%
24%
Did Not Meet Returns Failed to Fig. 4.7: Length of Time for Which Investors Will Tolerate Hedge Fund
Internal Were Too Meet or Underperformance before Redemption
Benchmark Low in Light Beat Equity 30%
of Fees Paid Market 26%
Returns
25%
PERFORMANCE AND REDEMPTIONS 20%

20%
Despite the improving performance seen
in the industry in 2017, over one-third of 15% 14%
12% 11%
investors cited underperformance as a
10% 8%
reason behind their decision to reduce
6%
their hedge fund exposure. With this in 5% 3%
mind, we assessed the length of time for
which hedge fund investors will tolerate 0%
6 Months
7-11 Months
On a Case-by-
a fund not meeting their expectations.
Less than
12 Months
18 Months
12-18 Months
3 Months
3-5 Months
More than
Case Basis
Twenty-six percent of respondents
will remain invested in a fund that
underperforms for more than 18 months
before considering a redemption (Fig. 4.7), Source: Preqin Investor Interviews, December 2017
highlighting the long-term nature of many
investors’ allocations to the asset class and
the tolerance they may have for short- Fig. 4.8: Investor Return Expectations for Their Hedge Fund Investments in the Next 12
Months Compared to the Past 12 Months
term performance issues.
PERFORMANCE IN 2018
In 2017, hedge funds delivered their
highest annual return since 12.72% in
28%
2013, with the Preqin All-Strategies Hedge 32%
Will Perform Better
Fund benchmark reaching 11.41%. Among
investors interviewed at the end of 2017,
views were mixed as to whether hedge Will Perform About the Same
funds would be able to maintain the

improved performance. Nearly three- Will Perform Worse
quarters (72%) of investors believe hedge
fund performance will either improve
in 2018 or remain level with 2017, with
40%
the remaining 28% believing hedge fund
returns will not be able to return to the
level of 2017 (Fig. 4.8). Source: Preqin Investor Interviews, December 2017
31
INVESTOR OUTLOOK ON
FEES
F ees remain a key issue at the forefront
of the hedge fund industry. Investors
have put pressure on the fee structure
The improvement in investor sentiment
stems from a range of factors surrounding
hedge fund terms and conditions –
INVESTORS PLANNING TO SEEK CHANGES
TO FEES CHARGED BY HEDGE FUNDS IN
THEIR PORTFOLIO IN 2018
of hedge funds in recent years, with decreasing fees and providing new
many high-profile investors citing fees provisions to protect investor capital are
as a driving factor behind hedge fund just some of the ways managers have
redemptions. This pressure is leading to looked to better align interests.
41%
an evolution both in what fee is charged
and also how it is levied. While the average CHANGES IN 2017 vs. AREAS TO IMPROVE
levels of management and performance IN 2018 59%
fees have been declining in recent years, The vast majority (85%) of investors
managers have also looked to add more interviewed in December 2017 have seen
provisions as a way of aligning their an improvement in the management fees
interests with those of their investors. charged by hedge funds over the course
of the past 12 months (Fig. 4.11). However,
Seeking Changes
INVESTOR SENTIMENT nearly two-thirds (64%) want to see further Not Seeking Changes
Investor sentiment with regards to the improvement in 2018, and while the
alignment of interests with their fund majority of investors seeking changes to
managers has improved over the course fees in 2018 will look for reductions in both with a wider range of options following
of 2017: two in five investors interviewed the management and performance fee, this demand for change, highlighted by the
feel their goals are aligned with those of 31% are looking for improvement solely in 34% of investors seeking improvements to
their hedge fund managers, an increase the management fee. the hurdle rate provision in 2018.
of nine percentage points from 2016
(Fig. 4.9). This stems from the favourable While investor concerns with management Hurdle rates and high-water marks are
changes investors have seen to hedge fees centre on the amount, the attitude the most sought-after provisions among
fund terms and conditions over the course of investors towards performance fees is the hedge fund investor community, with
of the year: the majority (55%) of investors different: 32% of respondents are looking 55% and 48% of respondents seeking
interviewed in December 2017 reported for improvements to how performance these provisions on their hedge fund
seeing changes to hedge fund terms and fees are charged, compared to 20% investments respectively (Fig. 4.12).
conditions in their favour in 2017, with no that want a reduction in the level of Provisions more commonly associated
respondents seeing changes favourable to performance fee. As such, the hedge with private equity funds, such as
hedge fund managers (Fig. 4.10). fund performance fee is not so much clawbacks, are sought by fewer investors.
decreasing as evolving to provide investors
Fig. 4.9: Extent to Which Investors Believe Investor and Fund Fig. 4.10: Proportion of Investors that Have Seen a Change in
Manager Interests Are Properly Aligned, 2015 - 2017 Prevailing Fund Terms and Conditions over the Past 12 Months
100%
90%
31%
80% 40%
Agree that
70%
69% Interests Are Change in Favour of
60% Aligned Investor
45%
50% No Change
Disagree that
40% Interests Are 55%
69% Aligned
30% 60% Change in Favour of
Fund Manager
20%
31%
10%
0%

4. HEDGE FUNDS
FEES IN THE FUNDRAISING PROCESS ALIGNING INTERESTS OUTLOOK

The importance of a hedge fund’s terms The greatest proportions of investor As we move into 2018, fees look set to
and conditions in the fundraising process (41%) and fund manager (49%) survey remain an important issue within the
is emphasized in Fig. 4.13. Eighty-five respondents indicate a fund manager hedge fund universe over the coming year.
percent of investors interviewed by Preqin investing capital in its own fund is the most Two in every five investors interviewed
have decided not to invest in a hedge fund effective way of aligning interests between in December 2017 stated plans to seek
due to the proposed terms and conditions. the two parties (Fig. 4.14). Greater levels changes to the fees charged by their
of investors (23%) believe transparency is hedge fund investments over the course
Fees have also played an important role in the most effective way of aligning interests of 2018. Many investors cited the returns
a fund manager’s ability to retain capital in than fund managers (14%). However, a not justifying the level of fees charged as
recent years. Of investor respondents with greater proportion of fund managers the reason behind this; however, as seen
plans to reduce their exposure to hedge believe offering all methods shown in in Fig. 4.11, some investors have witnessed
funds, 21% indicated that they are doing Fig. 4.14 proves most effective in a bid to positive change in 2017 and will be looking
so because of high fees and the costs improve alignment. to continue to challenge and reshape the
associated with hedge funds, behind only traditional hedge fund fee structure in
performance (39%) over the past three 2018.
years as a reason for reducing exposure.

Prevailing Fund Terms and Conditions over the Past 12 Months
and Where They Believe Alignment Can Be Improved Fig. 4.12: Hedge Fund Fee Structures Sought by Investors
90% 85%
80% Hurdle Rate 55%

Have Seen
70% 64%
Changes in Past
60%
12 Months
50% 41% High-Water Mark 48%
40% 34% 32% Believe
30% 22% 25% 23% 20% 20%
19% Alignment Can
20% 11% 15% 15%
7% 7% Be Improved Tiered Fee Levels 37%
10%
0%
Lock-up Period
How They Are Charged
Manager Commitment

Management Fees
Hurdle Rate
Performance Fees -
More Transparency
1 or 30 Fee Structure 31%

Performance Fees -
They Are Calculated

at Fund Level
Amount
to Fund
Clawback 29%
0% 20% 40% 60%

Fig. 4.13: Frequency with Which Investors Have Decided Not to Fig. 4.14: Investor and Fund Manager Views on the Most
Invest in a Fund Due to the Proposed Terms and Conditions Effective Way for Hedge Fund Managers to Align Interests
41%
Skin in the Game
49%
15%
23%
Greater Transparency
14%
Frequently Decided
35%
Not to Invest Differing Fee Terms Available 8%
to Investors 4%
Occasionally Decided
Not to Invest Offering Customized Solutions 3%
and Separate Accounts 6%
Never Decided Not
24%
to Invest Offering All of the above
27%
50%
0% 20% 40% 60%
Investors Fund Managers
Source: Preqin Investor Interviews, December 2015 - 2017 Source: Preqin Fund Manager Survey and Investor Interviews,
November and December 2017
33

O ur December 2017 interviews with
institutional investors active in hedge
funds reveal the end of a trend we have
Fig. 4.15: Investor Views on Where the Equity Market Is in the Current Cycle
PEAK
45%
seen since our December 2014 survey; for
the first time in this period, the proportion
of investors that plan to reduce their RECOVERY/
exposure to hedge funds over the next 12 EXPANSION PHASE
months does not outweigh the proportion 29%
planning to increase their exposure. In
RECESSION PHASE
fact, the greatest level of investors since
5%
December 2013 are looking to increase
UNSURE
the amount of capital dedicated to hedge
17%
funds in 2018. Given that both retaining
capital and raising fresh capital has been
TROUGH
challenging for the past few years, this is
4%
welcome news for hedge fund managers.
STRATEGIES SOUGHT IN 2018 Source: Preqin Investor Interviews, December 2017
So, with many investors looking to

rebalance in favour of hedge funds in As a result, we continue to see strong to macro strategies funds, with 2.5x more
2018, what is driving this and where is the appetite for diversifying strategies which (21%) looking to increase their allocation
capital likely to flow? Nearly half (45%) of may protect investors in the case of a to these strategies. Although macro
investors interviewed in December 2017 market correction. Although a relatively strategies generated the second lowest
believe equity markets may have reached small proportion (31%) of investors annual return of any top-level strategy
a peak in 2017 (Fig. 4.15). With this in interviewed invest through systematic in 2017, investors may also be looking
mind, nearly 4x as many investors plan to CTAs compared with other strategies, a to these strategies to add downside
position their portfolios more defensively significant 23% of these plan to increase protection to their portfolios should the
in 2018 than plan to position them more their weighting towards systematic CTAs extended equity market run come to a
aggressively (37% vs.10% respectively), over 2018 (Fig. 4.19). CTAs can provide sudden stop.
although just over half of all investors do uncorrelated returns to hedge funds and
not anticipate changing their investment equity markets, a possible reason behind In contrast – with many investors
stance in 2018. investor demand for this strategy in the believing that we may have reached the
coming year. Furthermore, just 8% of top of the equity market cycle – a greater
investors plan to decrease their exposure proportion of investors are looking to
Fig. 4.16: Investors’ Intentions for Their Hedge Fund Allocations Fig. 4.17: Amount of Fresh Capital Institutional Investors Expect
in the Next 12 Months, 2013 - 2017 to Invest in Hedge Funds over the Next 12 Months, 2013 - 2017
100% 100% 4%
8% 6% 2% 7%
13% 2%
90% 20% 90% 7% 11% 8%
26% 25% 27% 3% 11%
32%
80% 80% 9% 10%
$500mn or More
Proportion of Fund Searches
Increase 18%
24% 15% 6%
70% Allocation 70%
$250-499mn
60% 43% 60% 12%
44% Maintain 11%
50% 46% Allocation 50% $100-249mn
58%
40% 40%
60% 74% $50-99mn
Decrease 65% 69%
30% Allocation 30%
54%
49% Less than $50mn
20% 38% 20%
32%
27%
10% 10%
16%
8%
0% 0%
Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17
Source: Preqin Investor Interviews, December 2013 - 2017 Source: Preqin Hedge Fund Online

4. HEDGE FUNDS
decrease than increase their allocation Fig. 4.18: Number of Hedge Funds Institutional Investors Expect to Add to Their
to equity strategies in 2018 (16% vs. 14% Portfolios over the Next 12 Months, 2013 - 2017
respectively). 100% 2% 2% 1% 1% 2%
4% 4% 5%
9% 8%
90% 13%
STRUCTURES SOUGHT IN 2018 16%
80% 20% 22%
Although fewer investors use UCITS within 21% More than 20 Funds
Proportion of Fund Searches

their hedge fund portfolios than other 70%
fund structures such as commingled funds 11-20 Funds
60% 41%
(25% vs. 83%, Fig. 4.20), these investors 44%
50% 39% 37% 6-10 Funds
show a strong appetite for the structure 37%
over 2018: nearly half (48%) plan to 40%
3-5 Funds
increase their investments in alternative
30%
UCITS over 2018, with no investors
1-2 Funds
surveyed planning cuts to their UCITS 20% 42%
31% 32% 35% 34%
holdings. 10%
0%
A significant proportion (27%) of investors
in emerging managers are planning to
Source: Preqin Hedge Fund Online
further increase their exposure to this
group. In a period when performance
and fees are at the forefront of investors’
minds, emerging managers have become Fig. 4.19: Investor Allocation Plans for 2018 by Strategy
more attractive for their potential to Proportion of Respondents with Exposure to Strategy:
increase the former and reduce the latter. Systematic CTA 23% 63% 13% 31%
Emerging Markets 22% 64% 14% 28%
MORE CAPITAL DUE TO FLOW INTO Credit Strategies 22% 63% 15% 23%
HANDS OF MORE MANAGERS Macro Strategies 21% 71% 8% 83%
After a period of improved performance, Event Driven Strategies 18% 73% 9% 57%
investors are planning to increase Multi-Strategy 17% 70% 13% 55%
their hedge fund allocations in 2018 in Relative Value Strategies 17% 77% 7% 68%
terms of both the number and size of Equity Strategies 14% 70% 16% 65%
the mandates. Using data taken from Discretionary CTA 14% 73% 14% 62%
Preqin’s Fund Searches and Mandates Activist 11% 63% 26% 23%
feature, which details the planned fund Fund of Hedge Funds 10% 63% 27% 31%
investments for the 12 months ahead,
0% 20% 40% 60% 80% 100%
Figs 4.17 and 4.18 show a breakdown
of investor searches by the number of
Increase Exposure Maintain Exposure Decrease Exposure
new funds they plan to invest in over the
next 12 months and the amount of fresh
capital they aim to deploy. The proportion
(25%) of investors that are planning to put
Fig. 4.20: Investor Allocation Plans for 2018 by Structure
$100mn or more of fresh capital to work in
Proportion of Respondents with Exposure to Structure:
hedge funds over the year ahead is at its
highest level since December 2014 (33%). UCITS 48% 52% 25%
Similarly, this capital is expected to go into Co-Investment Opportunities 18%
44% 50% 6%
the hands of more managers compared to
Emerging Managers 27% 68% 5% 22%
recent years: 29% of investors searching
for new hedge funds in 2018 are looking Listed Funds 23% 61% 16% 29%
to invest in six or more funds; again, this is
Separately Managed Accounts 21% 70% 9% 32%
the highest level since December 2014.
Managed Accounts - Platforms 17% 74% 9% 23%
Commingled Funds 17% 74% 9% 83%
Alternative Mutual Funds 15% 77% 8% 25%
0% 20% 40% 60% 80% 100%

Increase Exposure Maintain Exposure Decrease Exposure
35
EMERGING TRENDS
ALTERNATIVE RISK PREMIA
Alternative risk premia, an actively managed strategy which aims to generate returns above the risk-free rate, is a growing area of the
hedge fund universe. Investing through risk premia styles, either as the fund’s primary strategy or as an overlay of an existing strategy,
the fund typically operates in a similar fashion to a traditional hedge fund, taking long or short positions across asset classes. Risk premia
styles include: carry, defensive, liquidity/size, mean reversion, momentum, value and volatility. One in 10 hedge fund investors currently
allocate to alternative risk premia vehicles, with almost a third of these investors planning to increase their exposure to these strategies
over the course of the coming year. The growth of the market looks set to continue with 12% of investors considering allocating to the
strategy in 2018, the greatest proportion among the three emerging trends.
11%
42% of all investors actively invest in alternative
risk premia, while a further
31%
of fund managers have seen increased of all investors active in alternative risk
appetite from institutional investors for 12% premia plan to increase their allocation to
alternative risk premia products over 2017. the strategy in 2018.
are considering investing in 2018.
ARTIFICIAL INTELLIGENCE/MACHINE LEARNING (AIML)
Used as a trading style, AIML hedge strategies employ machine learning algorithms to make autonomous trade decisions, using mass
amounts of data to compare new and historical trends. Parameters can be put in place with regards to exposure and costs, allowing
AIML algorithms to execute trades with reduced human oversight in the expectation of identifying trends humans may miss. Over half
(55%) of all investors currently allocating to AIML strategies are looking to increase their exposure to these funds in 2018, indicating the
potential for strong growth over the coming year in the sector that some see as the future of the industry. Eleven percent of all investor
respondents currently allocate to AIML hedge funds but a further 11% are considering moving into the space over the next 12 months.
11%
60% of all investors actively invest in AIML
funds, and a further
55%
of fund managers have seen increased of all investors active in AIML funds plan
appetite from institutional investors for 11% to increase their allocation to the strategy
AIML products over 2017. in 2018.
CRYPTOCURRENCY
2017 saw a number of cryptocurrency-focused hedge funds enter the market. Over the course of 2017, Bitcoin continuously hit record
highs amid significant volatility, reaching a landmark value in November 2017: one unit of the digital currency became worth over
$10,000 for the first time. With such strong returns seen in the cryptocurrency space in the past 12 months, investors have increasingly
sought exposure to these instruments and have looked to hedge fund managers to provide products active in the cryptocurrency
market. Seven percent of all hedge fund investors currently invest in cryptocurrency funds, with half of these investors looking to
increase their allocation to this market throughout 2018. Furthermore, 6% of investors are considering making their maiden investment
in the cryptocurrency market over the next 12 months.
7%
65% of all investors actively invest in
cryptocurrency funds, and a further
50%
of fund managers have seen increased of all investors active in cryptocurrency
appetite from institutional investors for 6% funds plan to increase their allocation to
cryptocurrency products over 2017. the strategy in 2018.

4. HEDGE FUNDS
HOW INVESTORS SOURCE

AND SELECT HEDGE FUNDS
I n our December 2017 interviews with over 200 institutional investors, we found that nearly 4x as many investors reported it was more
difficult to source attractive investment opportunities in 2017 than those that reported it was easier (38% vs. 10% respectively). With
this in mind, we examine in more detail the processes investors use to source, screen and select funds from the universe of 13,900+
hedge funds currently open for investment.
KEY STATS: AVERAGE SCREENING PROCESS FOR HEDGE FUNDS

■■ Mix of internal sourcing and direct 13,946
Hedge Funds
Open for Investment

REMOVING A FUND FROM SCREENING LIST:
88
88
88
Poor governance (45%) Investors Screen
220
Funds Each Year 20
of These Funds
99
Successful team track record (69%) Reach Second-
99
Experienced team (60%) Round
99
Investors
Commit to
2
Funds Each
Year


record 39%

32%
terms
18%

13%
37
SAMPLE HEDGE FUND

1 5
4 6
7
8 9
2 3
1 2 3
INFLECTION MANAGEMENT SAN FRANCISCO EMPLOYEES’ ALFRED I. DUPONT TESTAMENTARY TRUST
Type: Fund of Hedge Funds Manager RETIREMENT SYSTEM Type: Foundation
Location: British Columbia, Canada Type: Public Pension Fund Location: Jacksonville, FL, US
Total Assets: $10mn Location: San Francisco, CA, US Total Assets: $6bn
Looking to add 4-6 new hedge funds over Total Assets: $22.2bn Current/Target HF Allocation: 20%/20%
2018, allocating $10-15mn per investment, Current/Target HF Allocation: 2.6%/15% Although looking to maintain its allocation
and is looking at a wide variety of strategies. Plans to invest an additional $2.5bn in the to hedge funds in 2018, the foundation
next year, and expects its total exposure will be looking for new managers over
to the asset class to be $3.5bn within two the course of the year. Will consider all
years. strategies.
4 5 6
BALLENTINE PARTNERS CHURCH COMMISSIONERS FOR ENGLAND BHF-BANK
Type: Family Office Type: Endowment Plan Type: Wealth Manager
Location: Wolfeboro, NH, US Location: London, UK Location: Frankfurt, Germany
Total Assets: $11bn Total Assets: £7.9bn Total Assets: €42.7bn
Current/Target HF Allocation: 8%/10% Will consider adding 2-3 new funds in 2018. Current HF Allocation: 1%
Is currently under its target allocation to Is considering long/short equity, quant, Is looking to invest in new hedge funds over
hedge funds. Is looking to invest globally global macro or volatility overlay hedge 2018. Requires a minimum of a one-year
with new managers over 2018. Will invest funds. track record and targets single-strategy
with emerging managers, considering those funds in the event driven space. Invests in
with more than $100mn in AUM and a two- traditional hedge funds and UCITS.
year track record.
7 8 9
CIR GROUP NONGHYUP LIFE INSURANCE MITSUBISHI CORPORATION PENSION
Type: Corporate Investor Type: Insurance Company FUND
Location: Milan, Italy Location: Seoul, South Korea Type: Private Sector Pension Fund
Total Assets: €980mn Total Assets: KRW 61.03tn Location: Tokyo, Japan
Current HF Allocation: 3% Target HF Allocation: 1.2% Total Assets: JPY 580bn
Is looking for long/short equity and macro Considering investing in hedge funds for Current HF Allocation: 8%
hedge funds. Typically invests with US- the first time; will target fund of hedge Will consider investing in single- and multi-
based hedge fund managers. funds investments via a managed account manager funds in the US and European
structure. markets but will not consider investment
opportunities in its domestic market.

SECTION FIVE:
REAL ESTATE
TAKING THE LONGER-TERM

VIEW
T hese are challenging times to be
operating a real estate portfolio. Real estate is
is one of the highest among all alternatives
asset classes and looks set to play an
Interest rates are starting to rise. such a vital important part in asset allocation decisions
Fundraising is intensely competitive. component of most in the near future. The planned increase in
Property valuations have been increasing.
investors’ portfolios capital over both the next 12 months and
Return expectations are falling and many the longer term underscores investors’
participants feel we have already reached
that the real question confidence in the industry to achieve
the peak of the market. However, these is not ‘whether’ to expectations in a variable market, while
challenges are set against a backdrop participate in the those fund managers that can express
where the asset class has flourished since market, but ‘how’ a unique value proposition and mitigate
the Global Financial Crisis and delivered investors’ pricing concerns will likely be the
for the vast majority of investors that have recipients of capital commitments in 2018.
sought greater diversification of returns up by a fund manager base that has
within alternative assets. Furthermore, generally delivered for them in recent To correspond with the release of Preqin’s
there remains a significant proportion of years. Distributions have been high, 2018 Global Real Estate Report, Preqin
both fund managers and investors that are target allocations need to be met and conducted interviews with 244 institutional
either unsure of where we are in the cycle in a low interest rate environment, real investors in real estate at the end of
or believe there is still room to grow. estate continues to satisfy the desire for December to understand their changing
diversification, reliable income streams appetite for and attitudes towards the
What remains – even in this environment and attractive absolute returns. As such, asset class, their concerns and their
– is strong investor appetite, backed participation from the investor community investment plans for 2018.
LOOKING BACK INVESTOR SENTIMENT LOOKING FORWARD
88%
of investors surveyed feel their real
49%
of investors believe it is more difficult to
74%
of investors predict that the prospect of
estate investments met or exceeded find attractive investment opportunities interest rate rises will be the key macro
their expectations in 2017. than 12 months ago. factor to impact upon portfolios in 2018.
66%
of respondents feel that valuations are
56%
of surveyed investors cite residential
84%
of investors expect to commit the same
the key issue affecting real estate. properties as presenting the best amount of, or more, capital to real estate
opportunities. in the next 12 months, up from 76% in
2016.

5. REAL ESTATE
SATISFACTION WITH
REAL ESTATE
R obust performance and high
distributions have driven the largely
positive sentiment in recent years, with
The effects of this are twofold: firstly,
the vast majority of investors surveyed
found that the asset class has met their
reporting reduced confidence in real estate
over the past 12 months has increased in
comparison to one year ago (Fig. 5.3).
two in five investors interviewed at the expectations over both the one- (Fig.
end of 2017 holding a positive perception 5.2) and three-year periods (not shown). Despite this, investors remain committed
of the asset class, and the proportion of Secondly, investors – now flush with capital to the asset class over the long term, with
investors holding a negative view falling – have to work hard to reach their target 32% of institutions surveyed planning
for the third consecutive year to just 5% allocations, and as such will be continuing to increase the proportion of their total
(Fig. 5.1). The ability of closed-end funds to invest capital in 2018 – at the very least, assets allocated to real estate, and a
to deliver for investors is made even more at the same pace as in 2017 (see page 42). further 57% planning to maintain their
apparent by the scale of distributions: current levels of exposure (Fig. 5.4).
nearly $900bn has been released back However, with concerns rife (see page
to institutions from fund investments 43), institutions’ confidence in the asset
since 2013, including a record $278bn class to achieve portfolio objectives has
distributed over the whole of 2016. slightly waned: the proportion of investors
Fig. 5.2: Extent to Which Investors Feel Their Real Estate

Fig. 5.1: Investors’ General Perception of the Real Estate Investments Lived up Expectations over the Past 12 Months,
Industry, 2014 - 2017 2014 - 2017
100% 100%
90% 90% 22%

26%
37% 33%
80% 39% 80% 39%
52% 50%
70% 70% Exceeded
60% 60%
Neutral Met
50% 50%
66% Expectations
40% Negative 40% 67%
60% 51%
63% 56% Fallen Short of
30% 36% 43% 30%
Expectations
20% 20%
10% 10%
12% 10% 12%
7% 5% 7% 7%
0% 0%
Dec-14 Dec-15 Dec-16 Dec-17 Dec-14 Dec-15 Dec-16 Dec-17
Fig. 5.3: Investors’ Change in Confidence in the Ability of Real

Estate to Achieve Portfolio Objectives over the Past 12 Months, Fig. 5.4: Investors’ Intentions for their Real Estate Allocations in
2015 - 2017 the Longer Term, 2014 - 2017
100% 100%
10% 8%
90% 16% 90%
29% 32%
80% 80% 36% 36%
Increase
70% Increased 70% Allocation
Confidence
60% 60%
74% No Change Maintain
50% 77% 50%
71% Allocation
55%
40% 40% 57%
54%
Reduced 60% Decrease
30% 30% Allocation
Confidence
20% 20%
10% 18% 10%

13% 13% 16%
10% 11%
0% 0% 5%
Dec-15 Dec-16 Dec-17 Dec-14 Dec-15 Dec-16 Dec-17
41

STRUCTURAL PLANS ventures over 2018, including nearly half RELATIONSHIPS
More investors interviewed will be of respondents that are planning more Looking over the next two years, investors
increasing their exposure to direct activity in co-investments (Fig. 5.6). are generally looking to maintain the
investment (37%) and listed real estate number of fund manager relationships
(32%) than for other routes to market CAPITAL PLANS they hold in their portfolios, although the
(Fig. 5.5). The smallest proportion of Eighty-four percent of investors plan proportion stating they plan to increase
respondents seek to reduce exposure to commit at least the same amount this total surpasses those looking to
to closed-end and open-ended funds in of capital to real estate in the next 12 reduce by 10 percentage points (Fig.
2018 (both 9%) – the areas of highest months as they did over 2017, including 5.8). Crucially for the industry – where
institutional participation. However, all 26% that will look to invest more (Fig. commitments have gravitated to
routes appear to predict a net increase in 5.7). Significantly, the proportion (16%) of more established managers – it will be
activity over 2018 from investors surveyed. investors surveyed that will commit less interesting to see if investors will begin to
Appetite for alternative structures to the capital in the year ahead has reduced from look to form relationships with new firms
commingled fund model appears to be 2016 (24%); this may act as a tailwind for in the space in an environment where
continuing to grow. Investors are planning the fundraising market, which struggled in the signs point toward a contraction of
to ramp up activity across separate 2017 to surpass the pace of commitments returns.
accounts, co-investments and joint seen in 2016.
Fig. 5.5: Investors’ Intentions for Real Estate Investment in 2018 Fig. 5.6: Investors’ Intentions for Investment in Alternative Real
Compared to 2017 by Route to Market Estate Structures in 2018 Compared to 2017
100% 100%
90% 24% 20% 90%
37% 32%
80%
Increase 80% 40% 41%

70% Investment 51% More Activity

70%
60%
60%
Same Amount
50% Same Amount
71% of Investment 50%
40% 53% 67% of Activity
51%
40%
30% Reduce 47% 47%
30% Less Activity
20% Investment 44%
20%
10%
12% 15%
9% 9% 10%
0% 13% 13%
Direct Listed Real Closed-End Open Ended 0% 5%
Investment Estate Funds Funds Separate Co-Investments Joint Ventures
Route to Market Accounts
Fig. 5.7: Investors’ Expected Capital Commitments to Real Estate Fig. 5.8: Investors’ Intentions for the Number of Fund Managers
Funds in the Next 12 Months Compared to the Previous 12 in Their Real Estate Portfolios over the Next Two Years,
Months, 2014 - 2017 2016 vs. 2017
100% 100%
90% 90% 22%

25% 26% 28%
30%
80% 80%
More Capital
70% 70% More Fund

Managers
60% 79% 60%
Same Amount Same Number of
50% 51% of Capital 50%
Fund Managers
52% 58% 66%
40% 40% 59%
Less Capital Fewer Fund
30% 30% Managers
20% 20%
10% 21% 24% 10%

18% 16% 13% 12%
0% 0%

5. REAL ESTATE
KEY ISSUES IN 2018

F or the third consecutive year, investors
believe that valuations remain the
key issue facing the real estate industry
delivered in recent years may not continue
– 24% of respondents anticipate that their
portfolios will perform worse over 2018
and there remain significant proportions
of both groups that feel market expansion
will continue.
(Fig. 5.9). High entry prices have the (Fig. 5.10).
potential to have a knock-on effect on Low interest rates have helped the asset
the eventual performance of a fund With fund managers in agreement class in recent years, with 68% of investors
investment, as well as affect the viability regarding valuations, it has exacerbated believing this has had the biggest impact
of current deal pipelines, which were the concerns surrounding where we are in on their portfolios in the past 12 months.
two next most cited concerns among the market cycle. Again, both institutional However, with potential interest rate rises
institutional investors. Already we are investors and fund managers are in over 2018, 74% of those surveyed feel this
beginning to experience fund managers broad agreement about this point – will be the macro factor that has the most
reducing the targeted returns of vehicles approximately half of respondents from significant impact on portfolios in the year
they are bringing to market, although both groups believe we have already ahead (Fig. 5.12).
investors appear to understand that the reached the peak of the market (Fig. 5.11).
high absolute returns the asset class has However, real estate markets are deep
Fig. 5.10: Investor Return Expectations for Their Real Estate

Portfolios in the Next 12 Months Compared to the Previous 12
Fig. 5.9: Investor Views on the Key Issues for Real Estate in 2018 Months, 2016 vs. 2017
100%
Valuations 66% 9%
14%
90%
Performance 26% 80%
70% Will Perform Better

Deal Flow 25%
54%
60%
Exit Environment 18% 62% Will Perform About
50%
the Same
Interest Rates 17% 40%
Will Perform Worse
30%
Fees 16%
20% 37%
Volatility/Uncertainty
13% 24%
in Global Markets 10%
0% 10% 20% 30% 40% 50% 60% 70% 0%

Proportion of Respondents Dec-16 Dec-17
Fig. 5.12: Investor Views on the Macroeconomic Factors that

Fig. 5.11: Investor Views on Where Real Estate Is in the Current Had the Biggest Impact on Their Real Estate Portfolios in 2017
Market Cycle: Investors vs. Fund Managers vs. Predictions for 2018
100% 43%
Possible Interest Rate Rise
14% 16% 74%
90%
Low Interest Rates 68%
2% 31%
80% 5% 3% Unsure
6% Unwinding of Central Bank 14%
70% Balance Sheets 21%

Recession Phase 5%
60% 18%
50% Trough Equity Market Movements 8%
50% 48% 15%
Brexit Negotiations 13%
40% Peak 11%
Currency Market Movements 10%
30% 10%
Recovery/
20% US Domestic Policy 5%
Expansion Phase 8%
29% 27%
10%
0% 20% 40% 60% 80%
0% Proportion of Respondents
Investors Fund Managers Biggest Impact in 2017 Predictions for 2018
Source: Preqin Fund Manager Survey and Investor Interviews, Source: Preqin Investor Interviews, December 2016 - 2017
November and December 2017
43
INVESTOR VIEWS ON THE KEY CHALLENGES FACING THE REAL ESTATE MARKET
2016 2017 2018
Valuations Valuations Valuations

1
Performance Performance Performance
2
Deal Flow Exit Environment Deal Flow
3
Fulfilling Investor
Demands
Deal Flow Exit Environment
4
in Global Markets
Fees Interest Rates
5
Exit Environment
in Global Markets
Fees
6
Liquidity
Availability/Pricing of
Debt Financing
in Global Markets 7
Portfolio Management Regulation Regulation
8
Fundraising Portfolio Management
Availability/Pricing of
Debt Financing 9
Fees Interest Rates Portfolio Management
10
OUTSIDE TOP 10
ISSUES

5. REAL ESTATE
EXPECTATIONS AND
OPPORTUNITIES
W ith record numbers of funds in
market to choose from, interviewed
investors are finding it difficult to source
for Europe (Fig. 5.14). All other top-level
regional targets were cited by a minority of
the investors surveyed.
Investors believe the best opportunities
within the market lie within the residential
sector, with 56% of surveyed investors
attractive opportunities in the market citing this property type (Fig. 5.16). Beyond
(Fig. 5.13). This highlights the challenges When asked which strategies they regard this, more traditional commercial property
facing fund managers in marketing as most attractive at present, 42% of types – industrial and office – were cited
their vehicles effectively; knowledge of investors identified core funds, although as the best targets for investment. In a
investors’ favoured targets can be of help value added, core-plus and opportunistic difficult retail environment, only 13% of
in understanding current demand. real estate were not far behind (Fig. 5.15). investors believe this is where the most
Despite the rising interest and increase in attractive opportunities are, while 17% of
Developed markets are considered the fund searches issued for real estate debt investors believe the best opportunities
most promising regions for real estate in recent times, only 21% of respondents can be found within niche real estate
investment: 63% of investors believe North felt debt strategies were presenting the (which includes senior housing and
America presents the best opportunities best opportunities. student accommodation).
at present, while 49% stated the same
Fig. 5.13: Investor Views on the Difficulty of Identifying

Attractive Investment Opportunities Compared to 12 Months Fig. 5.14: Regions that Investors View as Presenting the Best
Ago, 2016 vs. 2017 Opportunities
100% 1%
6% North America 63%
90%
Europe 49%
80%
41% 49% Asia 19%

70%
Easier
60% Australasia 7%
No Change
50% Emerging Markets 6%
40% More Difficult
Latin America 4%
30%
53% 49% Africa 2%
20%
Middle East 0%
10%
0% 0% 10% 20% 30% 40% 50% 60% 70%

Dec-16 Dec-17
Fig. 5.15: Strategies that Investors View as Presenting the Best Fig. 5.16: Property Types that Investors View as Presenting the
Opportunities Best Opportunities
Core 42% Residential 56%
Value Added 38% Industrial 50%
Core-Plus 34% Office 44%
Opportunistic 33% Hotels 21%
Debt 21% Niche 17%
Distressed 17% Retail 13%
Fund of Funds 6% Land 10%
Secondaries 3% Operating Companies 6%
0% 10% 20% 30% 40% 50% 0% 10% 20% 30% 40% 50% 60%
Proportion of Respondents Proportion of Respondents

45
FUND TERMS AND

I nstitutional investors interviewed
by Preqin in December 2017 were
content with the prevailing fund terms
The majority (63%) of institutional
investors surveyed have seen no change
in fund terms over the past year, and of
Transparency at fund level (42%) and how
performance fees are charged (31%) were
also concerns.
and conditions in the real estate fund those that did, 3x as many saw changes in
market: 78% of institutions agreed that their favour than those that experienced Fig. 5.20 illustrates the importance of fund
fund manager and investor interests were movement in the opposite direction (Fig. managers ensuring that the fees they
properly aligned, a significant increase 5.18). charge are appropriate, particularly given
from 68% of investors surveyed at the end the challenging fundraising market at
of 2016 (Fig. 5.17). Correspondingly, the Those investors that are dissatisfied present. Eighty-six percent of institutional
proportion of investors that did not believe with the current alignment of interests investors have previously decided not
GP interests were properly aligned with identified a number of areas where to invest in a real estate fund due to the
their own has reduced to 22% from 32% improvements can be made (Fig. 5.19). proposed terms and conditions, including
in 2016. Management fees are of greatest concern 19% that have frequently rejected funds
to LPs (cited by 64% of respondents). based on their fee structures.
Fig. 5.18: Proportion of Investors that Have Seen a Change in

Fig. 5.17: Extent to Which Investors Believe that Fund Manager Prevailing Fund Terms and Conditions over the Past 12 Months,
and Investor Interests Are Properly Aligned, 2015 - 2017 2015 - 2017
100% 3% 100%
6% 6% 9% 7% 9%
90% 90%
80% 80%
Change in Favour
70% Strongly Agree 70% of Fund Manager
62% 56% 63%
60% 75% Agree 60% 63%
74%
No Change
50% 50%
Disagree
40% 40%
Strongly Disagree Change in Favour
30% 30%
of Investor
20% 20%
29% 35%
30% 28%
10% 19% 10%
20%
0% 3% 3% 0%

Prevailing Terms and Conditions over the Past 12 Months and Fig. 5.20: Frequency with Which Investors Have Decided Not to
Where They Believe Alignment Can Be Improved Invest in a Fund Due to the Proposed Terms and Conditions
70% 64%
60% 58% Have Seen

50% Changes in Past 14%
42% 12 Months 19%
40% 38% Frequently Decided
31%
31% Not to Invest
30% 28% 27% 25% Believe
23%
17% Alignment Can
20% 15%
12% 12% Be Improved
10% 8% 9% Occasionally
3% Decided Not to
0% Invest
Lock-up Period
Other
Transparency at
Hurdle Rate
GP Commitment
How They Are Calculated

Performance Fees -
Management Fees
Performance Fees -
Fund Level
Performance Fees -
Never Decided Not

Amount
to Invest
67%

5. REAL ESTATE

SELECT REAL ESTATE FUNDS
I n our December 2017 interviews with 244 institutional investors in real estate, 49% of respondents revealed that they found it more
difficult to identify attractive real estate fund opportunities in 2017 than in 2016. With this in mind, using investors’ responses and data
from Preqin’s platform, we examine in more detail the typical process that investors employ to source and screen real estate funds.
KEY STATS: AVERAGE SCREENING PROCESS FOR REAL ESTATE FUNDS

■■ Mix of internal sourcing and direct 586
Real Estate
Funds in Market

88
88
88
Below-average team track record (47%) Investors Screen
178
Real Estate Funds
Each Year
18
of These Funds
99
Experienced team (74%) Reach Second-
99
Successful team track record (69%) Round
99
Investors
Commit to
2
Funds Each
Year

record 47%

terms 42%

21%

21%
47
SAMPLE REAL ESTATE

4 6
2 5
1 3
7 9
1 2 3
TEACHERS’ RETIREMENT SYSTEM OF THE CANADIAN MEDICAL PROTECTIVE NIPPON LIFE GLOBAL INVESTORS
STATE OF ILLINOIS ASSOCIATION AMERICAS
Type: Public Pension Fund Type: Foundation Type: Insurance Company
Location: Springfield, US Location: Ottawa, Canada Location: New York City, US
Amount Investing in Next 12 Months: Amount Investing in Next 12 Months: Amount Investing in Next 12 Months:
$100-500mn CAD 40-50mn $180-280mn
Will commit to value added, opportunistic, Will invest in at least one new value added Will invest in 6-7 funds on an opportunistic
core-plus, debt, core and distressed real estate fund. basis across Asia, Europe and North
vehicles on a global scale, with $100mn America.
earmarked for co-investments in addition
to its direct activity.
4 5 6
SCHRODERS RETRAITES POPULAIRES TRYG
Type: Asset Manager Type: Public Pension Fund Type: Insurance Company
Location: London, UK Location: Lausanne, Switzerland Location: Ballerup, Denmark
Amount Investing in Next 12 Months: Amount Investing in Next 12 Months: Amount Investing in Next 12 Months:
£2bn CHF 100-150mn DKK 1bn
Will invest in five Europe-focused real estate Will invest in 10-15 real estate fund of funds Will commit up to DKK 1bn across three
funds on an opportunistic basis. vehicles across Asia, Europe and North Europe-focused core private real estate
America. funds.
7 8 9
STATE OIL FUND OF THE REPUBLIC OF THAILAND GOVERNMENT PENSION FUND POLICE MUTUAL AID ASSOCIATION
AZERBAIJAN Type: Private Sector Pension Fund (PMAA)
Type: Sovereign Wealth Fund Location: Bangkok, Thailand Type: Public Pension Fund
Location: Baku, Azerbaijan Amount Investing in Next 12 Months: Location: Seoul, South Korea
Amount Investing in Next 12 Months: THB 4bn Amount Investing in Next 12 Months:
$500mn Will invest in Asia-Pacific-focused value KRW 100-120bn
Will invest in 3-4 value added and added, opportunistic and debt vehicles. Will invest in 3-5 value added, opportunistic,
opportunistic vehicles that provide core-plus and debt vehicles on a global
exposure to Asia-Pacific, Europe and North basis.
America.

SECTION SIX:
INFRASTRUCTURE
STRONG INVESTOR APPETITE

CONTINUES
I n December 2017, Preqin surveyed
over 80 institutional investors actively
committing to the infrastructure asset
significant capital left to re-invest; it is
therefore unsurprising to find that 39% of
respondents expect to invest more capital
eat into the eventual returns investors
see from their infrastructure portfolios.
Furthermore, investors face the challenge
class to gauge their thoughts on the in infrastructure over the next 12 months of identifying GPs that can achieve the best
market and their appetite for investment than in the previous year. returns at an acceptable level of risk within
opportunities in 2018. a fiercely competitive fundraising market.
However, despite positive sentiment
High levels of capital distributions over the and continued growth in appetite for The majority (67%) of investors are under-
past two years, coupled with strong risk- infrastructure investment, investors have allocated to the asset class as at January
adjusted returns, have left investors more identified key challenges facing the market 2018, which makes it likely that GPs’ strong
than satisfied with the asset class. Ninety- that GPs should be aware of and address fundraising efforts will continue. However,
three percent of respondents stated that to ensure a successful fundraise. Increased the influx of capital to the asset class
the performance of their infrastructure participation in the asset class has created has contributed to elevated dry powder
investments had met or exceeded their a competitive deal environment and levels and is likely to result in increased
expectations in the past 12 months, up pushed up prices for infrastructure assets, competition among GPs for attractive
from 77% and 89% of survey respondents with 60% of investors surveyed citing asset investment opportunities.
in 2015 and 2016 respectively. With pricing as a key issue for the industry
distributions high, investors have in 2018. High prices may potentially
INVESTOR APPETITE MAKE-UP OF INVESTORS EVOLUTION OF INVESTORS
93%
of investors surveyed felt that their
66%
of investors have less than $10bn in
4.1%
Investors’ average current allocation to
infrastructure investments met or assets under management. infrastructure, below the average target
exceeded expectations in 2017. allocation of 5.6%.
60%
of respondents identified valuations
$139bn
Total amount allocated to the asset class
67%
of investors are below their target
as they key issue for the infrastructure by the 10 largest infrastructure investors. allocation to infrastructure.
market in 2018.
39%
of investors expect to commit more
$24.8bn
Estimated current allocation to the asset
45%
of investors will not invest in first-time
capital to infrastructure funds in the next class of Abu Dhabi Investment Authority, funds, the joint largest proportion in the
12 months compared to the previous the largest infrastructure investor period 2013-2018.
year. globally.

6. INFRASTRUCTURE
SATISFACTION WITH
INFRASTRUCTURE
T he majority (53%) of surveyed investors
have a positive perception of the
asset class – up from 44% in 2016 – and,
2015. Indicative of the level of investor
satisfaction with the asset class, the
proportion of respondents that felt their
likely a reflection of the sustained growth
within the industry, as well as the ability
of the asset class to achieve strong risk-
correspondingly, fewer investors have infrastructure investments had fallen short adjusted returns.
a negative perception of infrastructure of expectations was substantially lower at
investment (Fig. 6.1). This is likely due to 7% (vs. 23% in 2015). Fig. 6.4 shows that over the longer term,
strong performance within the asset class institutions remain committed to the asset
in recent years, with funds of vintage 2009 As at the end of 2017, 73% of investors class, with 55% of surveyed investors
onwards consistently generating median reported no change in their level of looking to increase their level of exposure
net IRRs around the 10% mark. confidence in infrastructure to achieve and a further 41% planning to maintain
portfolio objectives over the past year their allocation to infrastructure. The
As shown in Fig. 6.2, 93% of institutional – this is a greater proportion than 68% fact that only 4% are likely to reduce
investors felt that their infrastructure fund in December 2016 (Fig. 6.3). Likewise, allocations in the long term is indicative of
investments had met or exceeded their a smaller proportion (12%) reported investors’ confidence in the asset class to
expectations over the past 12 months, that their confidence in the asset class meet portfolio objectives.
an increase from 77% in December diminished over the year. Such views are
Fig. 6.2: Extent to Which Investors Feel Their Infrastructure Fund

Fig. 6.1: Investors’ General Perception of the Infrastructure Investments Have Lived up to Expectations over the Past 12
Industry, 2015 - 2017 Months, 2015 - 2017
100% 100%
12%
90% 90% 18%
25%
80% 80%
44%
56% 53% Exceeded

70% Positive 70%
Expectations
60% 60%
Neutral 59% Met
50% 50% 77%
Expectations
40% 40% 68%
39% Negative
30% 30% Fallen Short of
29% 39% Expectations
20% 20%
10% 10% 23%

14% 17%
9% 11% 7%
0% 0%
Fig. 6.3: Investors’ Change in Confidence in the Ability of

Infrastructure to Achieve Portfolio Objectives over the Past 12 Fig. 6.4: Investors’ Intentions for Their Infrastructure Allocations
Months, 2016 vs. 2017 in the Longer Term, 2015 - 2017
100% 100%
90% 17% 16% 90%
80% 80%
52% 53% Increase

Increased 70% 55%
70% Allocation
Confidence
60% 60%
No Change Maintain
50% 68% 50%
73% Allocation
40% 40%
Reduced
30% Decrease
30% Confidence 39% 37%
41% Allocation
20% 20%
10% 10%
15% 12% 9% 11%
0% 4%
0%
51

E levated amounts of capital distributed
to investors in the past two years
mean investors have significant amounts
Fig. 6.5: Investors’ Expected Capital Commitments to Infrastructure Funds in the Next
12 Months Compared to the Previous 12 Months, 2015 - 2017
100%
of capital left to re-invest and, with a high
90%
level of satisfaction in the asset class, are
likely to make further commitments to 80% 38% 39%
Proportion of Respondents 48%
infrastructure funds in the coming year. 70% More Capital
This is closely aligned with 39% of survey
60%
respondents expecting to invest more
capital in the asset class over the next 12 50% Same Amount of
months compared to the previous year Capital
40% 26%
(Fig. 6.5). 50% 51%
30% Less Capital
ROUTE TO MARKET 20%
Unlisted funds remain the preferred route 26%
10%
to market for infrastructure investors 12% 10%
planning to invest in the asset class in 0%
the next 12 months, with the proportion
of investors accessing the market via
unlisted vehicles steadily rising since
January 2015 (Fig. 6.6). The proportion investments in a more liquid format with to 40% and 13% respectively that look
of investors looking to make direct typically smaller ticket sizes and more to co-invest alongside GPs. There is a
investments has decreased over the same diverse industry exposure. discernible correlation between investor
period. The influx of new investors to the AUM and the use of alternative investment
infrastructure asset class, as well as the APPETITE FOR ALTERNATIVE STRUCTURES methods: 60% of investors with at least
resources and expertise investors need Investor appetite for alternative routes to $50bn in AUM make or consider separate
to successfully execute direct investment market has been driven by many factors, account investments (Fig. 6.7), while
transactions internally, may explain the including a desire for more control over 74% of investors with $50bn or more in
change over time. The proportion of their exposure and a more customizable AUM co-invest or are considering such
investors that prefer listed infrastructure fee structure. Twenty-eight percent of opportunities, which reflects the less
vehicles has steadily risen since January infrastructure investors look to utilize restrictive nature of such structures
2016, as the market continues to grow and separate accounts, with a further 10% in terms of the capital outlay required
investors recognize the benefits of holding considering such structures, compared compared to separate accounts.
Fig. 6.6: Preferred Route to Market of Infrastructure Investors

Searching for New Investments in the Next 12 Months, Fig. 6.7: Investor Appetite for Infrastructure Separate Accounts
2013 - 2018 and Co-Investment Opportunities by Assets under Management
100% 80%
91% 74%
90% 70%
78% 61% 60%
80% 76% 60%
73% Unlisted Co-Invest or

70%
70% 65% Funds Considering

50% 45% 47%
43% Co-Investing
60% 56%
40%
48% Direct
50% 46% 30% Make or
Investment 30%
40% 24% Considering
40%
32% Separate Account
29% 20%
30% Listed Investments
Funds 10%
20%
14%
9% 10%
10% 7% 6% 6% 0%
Less than $1-9.9bn $10-49.9bn $50bn or
0% $1bn More
Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18
Assets under Management
Source: Preqin Infrastructure Online Source: Preqin Infrastructure Online

6. INFRASTRUCTURE
KEY ISSUES IN 2018

P articipation in the asset class from
strategic and institutional investors
has increased over the past decade. While
key issue on investors’ minds, with high
valuations affecting managers’ ability to
put capital to work.
rise in asset prices. Among investors
interviewed, 48% found it more difficult
to identify attractive fund opportunities in
the proportion of investors employing 2017 than in 2016 (Fig. 6.10).
direct investment strategies has declined While 37% of investors believe that
slightly in recent years, they remain an infrastructure assets are fairly priced in the Seventy-two percent of surveyed investors
important component of many institutions’ current market cycle, 59% feel they have felt that the current low interest rate
overall investment strategy. Coupled been overvalued – although this includes environment affected their portfolios
with the large sums of capital raised 39% that feel a correction in the valuations in the past year, while 39% expect it to
by fund managers, this has made the of these assets is over a year away (Fig. impact upon their investments in the
infrastructure market more competitive. 6.9). Growing investor appetite has led to next year (Fig. 6.11). While only a quarter
It is therefore unsurprising to find that the fund managers having a record amount of of respondents felt the prospect of
largest proportion (60%) of infrastructure dry powder to deploy. Furthermore, with rising interest rates impacted upon their
investors interviewed have cited their key plenty of capital and resources at their portfolios, the largest proportion (49%)
concern for the year ahead as the pricing disposal, direct investment from sovereign expect it to have the biggest impact in the
of assets (Fig. 6.8). Deal flow is also a wealth funds has resulted in a significant next year.
Fig. 6.8: Investor Views on the Key Issues for Infrastructure in Fig. 6.9: Investor Views on Where Infrastructure Is in the Current
2018 Market Cycle
Valuations 60% Assets Undervalued, Considerable 2%

Deal Flow 34% Room for Further Price Rises
Regulation 20% Assets Undervalued, Some Room
2%
Fees 20% for Further Price Rises
Performance 18%
Assets Fairly Valued 37%
Exit Environment 16%
Volatility/Uncertainty in Global Markets 12% Assets Overvalued,
7%
Interest Rates 8% Correction Imminent
Availability/Pricing of Debt Financing 8% Assets Overvalued, Correction
13%
Public Perception of Industry 6% Likely within Next 12 Months
Governance 4% Assets Overvalued, Correction
39%
Commodity Pricing 4% More than 12 Months Away
0% 10% 20% 30% 40% 50% 60% 70% 0% 20% 40% 60%
Fig. 6.11: Investor Views on the Macroeconomic Factors that Had

Fig. 6.10: Investor Views on the Difficulty of Finding Attractive the Biggest Impact on Their Infrastructure Portfolios in 2017 vs.
Investment Opportunities Compared to 12 Months Ago Predictions for 2018
80% 72%
70%
Proportion of
Respondents
60%
9% 49%
50%
39%
40%
30% 25%
19% 20% 20% 17% 15%
20% 14% 15%
10%
8% 6% 8% 8%10% 6%
More Difficult 2%
0%
Tax Reform, Healthcare,
Currency Market
US Domestic Policy (e.g.
Prospect of Rising
Low Interest Rates
UK-EU Brexit
Commodity Price
Equity Market
Negotiations
Bank Balance Sheets
48%
Movements
No Change
Interest Rates
Infrastructure Plan)
Movements
Movements
43% Easier
Biggest Impact in 2017 Predictions for 2018
Source: Preqin Investor Interviews, December 2017 Source: Preqin Infrastructure Online
53
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6. INFRASTRUCTURE
STRATEGIES AND
STRATEGIES Fig. 6.12: Strategies that Investors View as Presenting the Best Opportunities
Despite the high levels of competition for
mature assets, 47% and 36% of investors Core 47%
respectively believe core and core-plus
Opportunistic 36%
strategies currently present the most
attractive opportunities (Fig. 6.12). With
Core-Plus 36%
66% of respondents favouring brownfield
projects, the demand reflects the stable
Value Added 28%
cash flows generated from such assets.
Investors also look favourably on higher- Fund of Funds 14%
risk opportunistic (36%) and value added
(28%) strategies, which may be due to Debt 12%
heavy competition for core infrastructure
assets. Secondaries 9%
0% 10% 20% 30% 40% 50%

SECTORS
The largest proportions of investors Proportion of Respondents
believe the conventional energy and
renewable energy sectors currently
present the most attractive opportunities REGIONS AGGREGATE CAPITAL RAISED BY
(49% and 46% respectively, Fig. 6.13). Such Fig. 6.14 shows that over two-thirds UNLISTED INFRASTRUCTURE FUNDS
interest in renewable energy investments (69%) of respondents believe North CLOSED IN 2017 BY PRIMARY
GEOGRAPHIC FOCUS
reflects a growing number of investors America presents the most compelling
that seek to take advantage of the opportunities, while 47% favour Europe, 35.4
opportunities created by technological reflecting the large amount of capital
improvements and falling costs in the sought by funds in market that are
sector. To meet this demand, investment primarily targeting these regions. As 21.9
in energy-related projects, technology competition for assets in established
and companies will increase in both the markets intensifies, resulting in higher
conventional and renewable energy valuations, investors may seek more 6.6
markets, creating opportunities for fund affordable opportunities in markets 1.5
managers searching for attractive assets elsewhere – at least a quarter of
and investors looking to deploy capital. respondents favour Asia and emerging North Europe Asia Rest of
markets. America World
Fig. 6.13: Sectors that Investors View as Presenting the Best Fig. 6.14: Regions that Investors View as Presenting the Best
Opportunities Opportunities
Energy (Excl. Renewables) 49% North America 69%
Europe 47%
Renewable Energy 46%
Asia 29%
Transport 44%
Emerging Markets 25%
Utilities 37%
Latin America 16%
Telecommunications 28%
Australasia 10%
Waste Management 18% Africa 7%
Social 13% Middle East 6%
0% 10% 20% 30% 40% 50% 0% 10% 20% 30% 40% 50% 60% 70%
55
FUND TERMS AND

ALIGNMENT OF INTERESTS Fig. 6.15: Areas in Which Investors Have Seen a Change in Prevailing Terms and
Since it is vital that institutional investors Conditions over the Past 12 Months and Where They Believe Alignment Can Be
Improved
consider fund terms and conditions when
looking to put capital to work, it is key 80%
70% 67%
for fund managers to ensure their fee 60% Have Seen
60% Changes in Past
Proportion of
structures are appropriate and aligned
Respondents
50% 12 Months
with the interests of their investors. Eighty- 40%
40%
one percent of investors interviewed by 30% 33%
30% 26% 26% 23% Believe
Preqin in December 2017 believe that 20% 15% 15% 16% Alignment Can
10% 10% 9%
fund manager interests are properly 10% 5% Be Improved
aligned with their own, up from 61% of 0%
respondents in December 2016. This
Lock-up Period
Hurdle Rate
Management Fees
More Transparency at
Performance Fees – How
Performance Fees – How
Performance Fees –
Manager Commitment
They Are Calculated

provides a strong indication that fund
They Are Charged

Fund Level
Amount
to a Fund
managers have continued to listen to, and
address, concerns by adopting terms that
meet investors’ needs.
DEVELOPMENTS IN PREVAILING TERMS

Thirty percent of investors believe that Source: Preqin Investor Interviews, December 2017
there have been changes in prevailing
fund terms in their favour over the past
Fig. 6.16: Frequency with Which Investors Have Decided Not to Invest in a Fund Due to
year, compared to a quarter of investors the Proposed Terms and Conditions, 2016 vs. 2017
interviewed at the end of 2016. Fees
100%
remain a contentious issue for investors
in the infrastructure industry, and in 90%
26% 26%
the wider alternative assets universe, 80%
amid a highly competitive fundraising Frequently Decided

70% Not to Invest
environment. Management fees, greater
transparency from fund managers and 60%
hurdle rates were cited by the largest Occasionally Decided
50% Not to Invest
proportions of investors as areas in which 56%
40% 65%
they would like to see improvements (Fig.
6.15). However, 60% of surveyed investors Never Decided Not to
30%
Invest
have seen changes to management fees
20%
in the past year, while 30% have witnessed
changes to hurdle rates, suggesting that 10% 19%
9%
GPs are responding to investor concerns. 0%
Dec-16 Dec-17
In a competitive fundraising environment Source: Preqin Investor Interviews, December 2016 - 2017
which has seen capital increasingly
concentrated among fewer fund frequently decided not to invest in a fund
managers, presenting favourable fund due to the proposed terms and conditions,
terms and conditions has become an remaining at a similar level to December
important way for GPs to differentiate 2016 (Fig. 6.16). There is therefore still
themselves from their competitors and a way to go in order to improve the
entice LPs to make commitments to their alignment of interests between GPs and
funds. Eighty-two percent of investor LPs.
respondents have either occasionally or

6. INFRASTRUCTURE

SELECT INFRASTRUCTURE FUNDS
I n our December 2017 interviews with over 80 institutional investors, 48% revealed that they found it more difficult to identify attractive
infrastructure fund opportunities in 2017 than in 2016. With this in mind, we examine in more detail the processes that investors use
to source and screen funds based on data from our online platform and responses to our survey.
KEY STATS: AVERAGE SCREENING PROCESS FOR UNLISTED INFRASTRUCTURE FUNDS

■■ Mix of internal sourcing and direct 166
Unlisted Infrastructure
Funds in Market

88
88
Lack of firm track record (41%)
88
Unfavourable fees/fund terms (41%)
Investors Screen

94
Funds Each Year 3
WHEN SELECTING NEW FUNDS: of These Funds
99
Team track record (71%) Reach Second-
99
Team strategy experience (71%) Round
99
Firm track record (58%) Screening
Investors
Commit to
2
Funds Each
Year

record 55%
45%
investment strategy
26%
terms
57
SAMPLE INFRASTRUCTURE
1 3 45
2 6
7 8
1 2 3
CANADIAN MEDICAL PROTECTIVE NIPPON LIFE GLOBAL INVESTORS UMR COREM
ASSOCIATION AMERICAS Type: Public Pension Fund
Type: Foundation Type: Insurance Company Location: Nantes, France
Location: Ontario, Canada Location: New York, US Amount Investing in Next 12 Months:
Amount Investing in Next 12 Months: Amount Investing in Next 12 Months: €60-90mn
CAD 30mn $150-420mn Expects to invest in 2-3 funds focused on
Expects to invest in one unlisted value Expects to invest in 5-6 unlisted Europe and North America across a range
added infrastructure fund with a global infrastructure funds, targeting all industries of industries, using a mixture of new and
reach and exposure to a wide variety of (except for energy), focusing on Europe, existing managers in its portfolio.
industries. North America and Rest of World.
4 5 6
PROFELIA BAYERISCHE VERSORGUNGSKAMMER EQUITER
Type: Public Pension Fund Type: Public Pension Fund Type: Investment Company
Location: Lausanne, Switzerland Location: Munich, Germany Location: Turin, Italy
Amount Investing in Next 12 Months: Amount Investing in Next 12 Months: Will invest in unlisted infrastructure funds
CHF 100mn €800mn opportunistically in the next 12 months,
Expects to make 5-10 investments both Expects to invest in 3-4 unlisted focusing on the renewable energy industry
directly and through unlisted infrastructure infrastructure funds, focused on Europe in Europe. Will primarily use existing
fund of funds vehicles, focusing on Europe. and North America, targeting a diverse managers in its portfolio, along with some
range of assets. new ones.
7 8 9
NONGHYUP BANK DAIDO LIFE INSURANCE AUSTRALIAN NATIONAL UNIVERSITY
Type: Bank Type: Insurance Company ENDOWMENT FUNDS
Location: Seoul, South Korea Location: Tokyo, Japan Type: Endowment Plan
Amount Investing in Next 12 Months: Expects to invest in unlisted infrastructure Location: Canberra, Australia
KRW 200-300bn funds opportunistically, targeting the Amount Investing in Next 12 Months:
Expects to invest in unlisted infrastructure renewable energy, transportation and AUD 10-15mn
funds, targeting both primary and debt/ utilities sectors with a global reach, Expects to make 2-3 investments both
mezzanine strategies, focusing on the primarily focused on developed countries. directly and through unlisted infrastructure
renewable energy and utilities industries Will use both new and existing managers in funds, focusing on brownfield assets
across Asia-Pacific. its portfolio. and environmentally friendly industries
including clean technology and renewable
energy.

SECTION SEVEN:
PRIVATE DEBT
POSITIVE SENTIMENT BEHIND

GROWTH OF PRIVATE DEBT
P rivate debt has remained a growth
story fuelled by positive investor
sentiment throughout 2017, and seems
considering doing so in the near term.
North America and Europe remain the
most active regions in the asset class for
Looking back at investor satisfaction with
private debt performance in recent years,
33% of survey respondents contend
poised to continue on the same path into both investors and fund managers – over that their private debt portfolio has
2018 given the results of Preqin’s most 93% of capital secured by funds closed exceeded expectations over the past
recent investor survey. It was stated in the in 2017 will be invested in either market. three years, with a further 59% suggesting
H1 2017 Investor Outlook that private Additionally, the regions combined performance has met expectations in
debt investors were looking to increase account for 81% of active investors in the same timeframe. In the past year, a
exposure throughout the year, and that private debt. quarter have seen expectations exceeded,
came to fruition in the form of record with a further 65% of respondents
fundraising for the asset class, having Sources of allocation across active investor having seen expectations met. Overall,
committed in excess of $107bn across groups can vary, as 57% of investors these figures show a large proportion
more than 140 funds that closed during make commitments through a private of investors generally positive on their
the year. Exposure to diverse private equity allocation, with 14% employing a allocations to private credit, a strong
credit offerings has become somewhat of separate private debt allocation (up three indication that participants will likely
a core practice for diversified institutional percentage points from 2017). Eleven uphold varying private debt allocations
portfolios at the outset of 2018. percent of investors in private debt invest moving forward.
from a general alternatives allocation,
There are currently over 3,100 active while 10% allocate as part of multiple
institutional investors in private debt that allocations.
have made a fund commitment or are
INVESTOR SENTIMENT PROSPECTS FOR Q1 CAPITAL ALLOCATIONS
51%
of respondents have a positive general
46%
of investors believe portfolio companies
42%
of investors expect to invest more capital
perception of the private debt asset and assets are fairly valued at the start in private debt in the next 12 months
class. of 2018. compared with the past 12 months.
79%
of investors agree that fund manager
57%
of investors plan to make their next
98%
of investors plan to maintain or increase
and investor interests in private debt are private debt fund commitment in Q1 allocations to private debt in the long
properly aligned. 2018. term.

7. PRIVATE DEBT
SATISFACTION WITH
PRIVATE DEBT
A t the end of 2017, Preqin
interviewed a sample of the investor
community to gauge their perspective
Fig. 7.1: Investors’ General Perception of the Private Debt Industry, 2015 - 2017
100%
90%
on the performance of their private
debt investments in 2017, as well as 80%
their attitudes towards the market 54% 51%
70% 60% Positive
moving forward. As in recent years with
60%
private debt, institutional investors have Neutral
demonstrated positive sentiment and are 50%
generally increasing allocations as the Negative
40%
market continues a trend of expansion
globally. 30% 37%
36%
31%
20%
Similar to the end of 2016, the majority
10%
of investors are confident in their private 10% 9% 12%
debt investments. More than half (51%) 0%
of investors surveyed in December 2017
have a positive perception of the asset Source: Preqin Investor Interviews, December 2015 - 2017
class, compared with just 12% that hold

a negative view (Fig. 7.1). This is welcome a third of investors surveyed in private While confidence in the private debt
news for fund managers that have been debt have seen expectations exceeded, industry is still high, investors are rightly
steadily increasing fund target sizes as the as have a quarter of investors over the conservative about the prospects for
private credit market continues expanding past year. As private debt managers have the market moving forward. Despite
after posting a record fundraising year. generally been able to match or surpass the proportion of investors reporting
the expectations of investors, high levels increased confidence in private debt falling
Investors that have accessed private debt of investor satisfaction are being reported, to 16% in December 2017 from 29% of
opportunities in recent years are largely which certainly indicates allocators would those interviewed in December 2016, only
satisfied with their investments, as only be likely to continue to make or initiate 6% are less confident in the asset class
10% and 8% felt investments had fallen new private debt fund commitments in than they were one year ago, dropping
short of their expectations over the past coming fundraising cycles. from 10% at the end of 2016. Overall, 78%
one and three years respectively (Figs of investors are just as confident in private
7.2 and 7.3). Over the past three years, debt as they were a year ago.
Fig. 7.2: Extent to Which Investors Feel Their Private Debt Fig. 7.3: Extent to Which Investors Feel Their Private Debt
Investments Have Lived up to Expectations over the Past 12 Investments Have Lived up to Expectations over the Past Three
Months Years
10% 8%
25%
Exceeded Exceeded
33%
Expectations Expectations
Met Expectations Met Expectations
Fallen Short of Fallen Short of

Expectations Expectations
59%
65%
61

INVESTOR APPETITE FOR PRIVATE DEBT Performance expectations are also In addition, 47% of investors expect
IN 2018 optimistic, as 18% of investors expect to increase the number of debt fund
Forty-eight percent of investors plan to superior performance from their managers in their portfolios over the
commit the same amount of capital to investments in 2018 compared to 2017, next two years (Fig. 7.7). Together,
the asset class in 2018 as in 2017, while with 62% expecting comparable results these suggest that institutional investor
42% will commit more capital (Fig. 7.4). (Fig. 7.5). Twenty percent of investors are confidence in the asset class has been and
As investors’ confidence in the asset class preparing for less favourable outcomes. should remain at high levels throughout
remains high, fund managers are also the year. Expansion of the capital pool is
targeting record levels of fundraising, with ALLOCATIONS TO PRIVATE DEBT certainly a great sign for fund marketers,
more than $158bn in capital commitments As more investors put capital into the asset which may now have greater access to
being sought as at January 2018. Off the class over the next 12 months, average investor types that have either not been
back of a record fundraising year in 2017, allocations are also expected to increase able to or have not chosen to allocate to
it seems that investors may yet again over the longer term: 54% of respondents private credit in the past and could now
allocate at unprecedented levels to private plan to increase their allocations to private seek exposure in the space.
debt funds. debt in the longer term and just 2% plan to
decrease them (Fig. 7.6).
Fig. 7.4: Investors’ Expected Capital Commitments to Private Fig. 7.5: Investor Return Expectations for Their Private Debt
Debt Funds in the Next 12 Months Compared to the Previous 12 Investments in the Next 12 Months Compared to the Previous
Months, 2015 - 2017 12 Months
100%
90%
80% 42% 20% 18%

46%
70% 57% More Capital

Will Perform Better
60%
50% Same Amount Will Perform About

of Capital the Same
40%
41% 48% Will Perform Worse
30% Less Capital
32%
20%
10%
13% 11% 10% 62%
0%
Fig. 7.7: Investors’ Intentions for the Number of Fund Managers

Fig. 7.6: Investors’ Intentions for Their Private Debt Allocations Relationships in Their Private Debt Portfolios in the Next Two
over the Long Term, 2015 - 2017 Years
100%
90%
5%
80%
52% 54% More Fund

70% 62% Increase Allocation Managers
60%
Maintain Allocation Same Number of

50% 48% Fund Managers
40%
47%
Decrease Allocation Fewer Fund
30%
40% Managers
30% 44%
20%
10%
8% 8%
0% 2%

7. PRIVATE DEBT
KEY ISSUES IN 2018

W hile the outlook for the asset class
in both the near and long term is
generally positive, investors interviewed at
Fig. 7.8: Investor Views on the Key Issues for Private Debt in 2017 vs. 2018
Valuations 40%
40%
the end of 2017 remain wary of key issues 36%
Deal Flow
within the market for 2018. The proportion 29%
of investors that see the valuations of Volatility/Uncertainty 26%
in Global Markets 21%
private debt assets as a key issue has
Performance 33%
remained steady since December 2016 at 17%
40% (Fig. 7.8). However, all other issues 26%
Regulation
such as deal flow (29%), performance 16%
Availability/Pricing 22%
(17%) and regulation (16%) have declined
of Debt Financing 14%
in prominence from one year ago as
Transparency 10%
investor worries ease. 5%
0% 10% 20% 30% 40% 50%

Over a quarter (28%) of investors surveyed
are finding it harder to identify attractive
investment opportunities than a year ago, 2017 2018
compared with 65% that have seen no Source: Preqin Investor Interviews, December 2016 - 2017
change and a mere 7% that are finding it

easier. This could indicate that there may
Fig. 7.9: Investor Views on Where Private Debt Is in the Current Market Cycle
be increasing levels of capital chasing too
few valuable opportunities. Assets Undervalued, Considerable
4%
Room for Further Price Rises
THE CURRENT PRIVATE DEBT MARKET
Assets Undervalued, Some
CYCLE 7%
Room for Further Price Rises
As shown in Fig. 7.9, a small proportion
(11%) of investors believe there is room for Assets Fairly Valued 46%
asset prices to rise in 2018; however, most
Assets Overvalued,
investors feel that the current private debt 18%
Correction Imminent
market cycle has reached its peak. Opinion
is split regarding the precise stage of the Assets Overvalued, Correction
9%
Likely within Next 12 Months
cycle: 46% of investors think portfolio
companies and assets are valued fairly, Assets Overvalued, Correction
18%
while 45% feel that pricing is too high More than 12 Months Away
and a correction is due. Nine percent of 0% 10% 20% 30% 40% 50%
investors feel the correction is due within
the next 12 months and 18% suggest a
correction is imminent.
PREQIN’S PRIVATE DEBT DATA
Preqin’s award-winning private debt data covers all aspects of the asset class, including fund managers, fund performance,
fundraising and institutional investors.
This comprehensive platform is ideal for fund marketers and investor relations professionals focused on private debt and
credit funds.
www.preqin.com/privatedebt
63
FUND TERMS AND

I n December 2017, Preqin interviewed
private debt investors regarding
their attitudes towards fund terms and
Fig. 7.10: Investor Views on How Management Fees Should Be Charged: All Private Debt
Funds vs. Direct Lending Funds
100%
conditions, including management fees
90%
and illiquidity premiums.
80% 39%
45%
Depends on the Strategy/
INVESTED vs. COMMITTED CAPITAL 70% Direct Lending Manager
When asked about the structure of 60% 5%
management fees for private debt funds 5% Committed Capital
50%
across all strategies, half of respondents
prefer to pay management fees on 40%
invested capital, five percentage points 30% Invested Capital
56%
lower than December 2016. Just 5% of 50%
20%
investors expect to pay fees on committed
10%
capital (Fig. 7.10). The remaining
45% suggested that the fee structure 0%
should depend on the specific strategy All Private Debt Direct Lending
employed, as private credit fund types Funds Funds
can differ greatly regarding how fees are
collected given the level of infrastructure,
administration and personnel required. Fig. 7.11: Investors’ Preferred Illiquidity Premium for Direct Lending Funds
For direct lending funds specifically, 56% of

respondents expect to pay fees on invested 0-100bps 8%
capital, again lower than in December 2016
(64%). Additionally, 39% of investors stated
that the accepted fee structure would 101-200bps 27%
depend on the manager, signalling that
there remains room for fee diversity within
direct lending, likely with more experienced 201-300bps 36%
managers maintaining leverage in fee
negotiations. Just 5% of respondents within
direct lending expect fees to be levied on 301+bps 30%
committed capital, up three percentage
points from the same survey one year
earlier. 0% 5% 10% 15% 20% 25% 30% 35% 40%
ILLIQUIDITY PREMIUM FOR Source: Preqin Investor Interviews, December 2017
DIRECT LENDING
Fig. 7.11 reflects investor opinions on preference for illiquidity premia above 300
illiquidity premia specifically for direct basis points. Only 8% of respondents are
lending funds. The largest proportion (36%) accepting of compensation at or below 100
of investors expect their illiquidity premium basis points, potentially indicating less of
to fall within 201-300 basis points for a a focus on an illiquidity premium versus
direct lending fund, given general lifespans traditional assets and a greater focus on
of 3-7 years for direct lending funds. Thirty strategy-specific advantages.
percent of investors surveyed indicated a

7. PRIVATE DEBT

SELECT PRIVATE DEBT FUNDS
I n our December 2017 interviews with institutional investors, 28% revealed that they found it more difficult to identify attractive private
debt fund opportunities in 2017 than in 2016. With this in mind, we examine in more detail the processes that investors use to source
and screen funds based on data from Preqin’s platform and survey of 82 private debt investors conducted in December 2017.
KEY STATS: AVERAGE SCREENING PROCESS FOR PRIVATE DEBT FUNDS
335
■■ Through internal investment team (23%)
■■ Mainly internal or consultant
Private Debt
recommendations, some external Funds in Market
approaches (15%)
■■ Mix of internal and external
recommendations (43%)

REMOVING A FUND FROM SCREENING LIST:
88
88
Lack of firm track record (42%) Investors Screen
88
240 Less than
15
Private Debt Funds
Each Year
WHEN SELECTING NEW FUNDS: of These Funds
Reach Second-
99
Successful team track record (71%) Round
Screening
99
Experienced team (69%)
99
Successful firm track record (60%)
Investors
Commit to
1-4
Funds Each
Year
track record 46%
fees/fund terms 29%

appropriate reporting guidelines 23%

17%
65
SAMPLE PRIVATE DEBT

6 7
3
4
1 2 5
9
1 2 3
FORT WASHINGTON CAPITAL PARTNERS DUPONT CAPITAL MANAGEMENT GLENDOWER CAPITAL
Type: Private Equity Fund of Funds Type: Private Equity Fund of Funds Type: Secondary Fund of Funds Manager
Manager Manager Location: London, UK
Location: Cincinnati, US Location: Wilmington, US AUM: $3bn
AUM: $4.7bn AUM: $2bn Will look to target distressed debt, special
Will target distressed debt and mezzanine Plans to make new commitments to private situations and mezzanine vehicles. Will
vehicles, focused predominantly on debt funds over the next 12 months as invest on a global scale, with a primary
North America, but will also consider part of its private equity allocation. Expects focus on North America, Europe, Asia and,
opportunities across Europe and Asia. Is to deploy $300mn to special situations to a lesser extent, emerging markets. Is
open to making new commitments with vehicles, as well as buyout and venture looking to continue working with existing
existing portfolio managers, as well forming capital funds, with a focus on opportunities managers in its portfolio and to form new
new GP relationships. across North America and Europe. GP relationships.
4 5 6
ZURICH INVEST FONDAZIONE CASSA DI RISPARMIO DI LOCALTAPIOLA GROUP
Type: Asset Manager LUCCA Type: Insurance Company
Location: Zurich, Switzerland Type: Foundation Location: Espoo, Finland
AUM: CHF 20bn Location: Lucca, Italy AUM: €8.5bn
Current PD Allocation: 7.5% AUM: €1.2bn Current PD Allocation: 5%
Will target direct lending, distressed debt, Current PD Allocation: 4% Plans to commit between €110mn and
mezzanine and special situations vehicles Plans to continue targeting private debt €120mn across 4-6 mezzanine and direct
that are mainly focused on Europe, over the next 12 months, with a preference lending funds.
the US and Asia, but will also consider for Europe-focused direct lending and
opportunities globally. mezzanine vehicles.
7 8 9
FINNISH INNOVATION FUND (SITRA) FTLIFE INSURANCE COMPANY KOREA FIRE OFFICIALS CREDIT UNION
Type: Sovereign Wealth Fund Type: Insurance Company Type: Public Pension Fund
Location: Helsinki, Finland Location: Hong Kong Location: Seoul, South Korea
AUM: €850mn AUM: $3bn AUM: KRW 772bn
Plans to invest in private debt over the next Current PD Allocation: 2% Will target direct lending and mezzanine
12 months with a mix of new and existing Mainly interested in CLOs, direct lending vehicles that are less than KRW 2.3tn ($2bn)
fund managers. Invests in mezzanine funds and mezzanine vehicles. Is sector agnostic in size and focused on opportunities in
and primarily looks to gain exposure to the and has a global outlook, with an interest in OECD countries.
Nordic region. Asia, the US and Europe; is also open to the
more developed countries within ASEAN,
but will not look at emerging markets.

SECTION EIGHT:
NATURAL RESOURCES
IMPROVING INVESTOR
SENTIMENT CONTINUES
A fter a few years of concerns over
natural resources performance
affecting investor sentiment and therefore
managers looking to secure capital in 2018
need to be aware of and allay if they are to
have a successful fundraise. Twenty-seven
important part of investors’ alternative
assets portfolios as they continue to seek
diversifying assets that can deliver yield in
capital commitments, 2018 was a year percent and 25% of investors respectively a continued low interest rate environment.
of considerable progress. While 21% told us that the key issues in the natural
of investors interviewed at the end of resources space are commodity pricing For the asset class to continue to grow
2017 told Preqin that their investments and volatility in global markets – two it is vital that managers are able to
in natural resources had fallen short of very much linked concerns. Investors are demonstrate that they can successfully
expectations over the past year, this is looking for fund managers to generate deploy capital, as we started to see in
a significant improvement from 54% of alpha, while at the same time mitigating as H1 2017. Coupled with a considerable
those questioned at the end of 2016. much as possible the potential downside number of funds on the road in 2018
Furthermore, 18% said their natural of commodity price movements driven by and improving investor sentiment, this
resources investments had exceeded a geopolitical environment that is mostly indicates that 2018 will likely be another
expectations in 2017. both uncontrollable and unpredictable. strong year for the natural resources asset
class.
Despite improving sentiment with respect Despite a number of years of struggling
to the asset class as a whole, investors performance driven by commodity
continue to express concerns that price falls, natural resources remain an
INVESTOR SENTIMENT CAPITAL ALLOCATIONS LOOKING FORWARD
79%
of investors felt their natural resources
81%
of investors plan to commit the same
27%
of investors surveyed consider each of
investments met or exceeded amount of capital or more to natural performance and commodity pricing as
expectations in the past 12 months. resources in 2018 than in 2017. the key issues for 2018.
22%
of investors surveyed have a positive
63%
of investors are below their target
44%
of investors see each of conventional
perception of the asset class. allocations to the asset class. energy and renewable energy as
presenting the best opportunities.

8. NATURAL RESOURCES
SATISFACTION WITH
NATURAL RESOURCES
W hile the proportion of investors
with a negative perception of the
asset class has halved compared to our
expectations over the past 12 months (Fig.
8.2). Furthermore, alongside a short-term
improvement in how investors feel their
Although fewer respondents have
reported increased confidence in the
ability of natural resources to achieve
December 2016 investor survey, the natural resources investments have lived portfolio objectives compared to the
proportion with a positive perception up to expectations, over a longer time previous year, the proportion citing
has also decreased: 69% of investors horizon a significant 62% reported that reduced confidence in the asset class has
interviewed at the end of 2017 have a their investments have met or exceeded fallen by five percentage points to 15%
neutral attitude towards natural resources expectations over the past three years, (Fig. 8.4).
(Fig. 8.1). up 17 percentage points from the
corresponding proportion in 2016. This
In a reversal from December 2016, the shows that the improvement in investor
majority (79%) of investors found that the sentiment extends beyond just the past 12
performance of their natural resources months.
investments met or exceeded their
Fig. 8.2: Extent to Which Investors Feel Their Natural Resources

Fig. 8.1: Investors’ General Perception of the Natural Resources Investments Have Lived up to Expectations over the Past 12
Industry, 2016 vs. 2017 Months, 2016 vs. 2017
100% 100%
10%
90% 22% 90% 18%
29%
80% 80%
Exceeded
70% 70% 37%
60% 60%
Neutral Met
50% 50% 61%
Expectations
51% 69%
40% Negative 40%
Fallen Short of
30% 30% Expectations
54%
20% 20%
10% 20% 10% 21%

9%
0% 0%
Dec-16 Dec-17 Dec-16 Dec-17
Fig. 8.3: Extent to Which Investors Feel Their Natural Resources Fig. 8.4: Investors’ Change in Confidence in the Ability of Natural
Investments Have Lived up to Expectations over the Past Three Resources to Achieve Portfolio Objectives over the Past 12
Years, 2016 vs. 2017 Months, 2016 vs. 2017
100% 2% 100%
10% 12% 10%
90% 90%
80% 33% 80%

Exceeded Increased
Confidence
52%
60% 60%
Met No Change
68% 75%
40% 40% Reduced

Fallen Short of Confidence
30% 65% 30%
Expectations
20% 38% 20%
10% 10% 20%

15%
0% 0%
69

D espite the increasingly positive view
of the asset class, when investors
were asked about their expected capital
Over the longer term, 72% of investors
plan to maintain their current allocation
to the asset class, while another 10%
investors looking to invest less than $50mn
in 2018 (Fig. 8.7). An increasing proportion
of investors, seven percentage points
commitments to natural resources over intend to increase their allocation (Fig. more than at the end of 2016 (13% vs.
the next year compared to the previous 8.6). Investors appear to be gradually 20%), will look to commit $100-349mn in
year, just 11% expected to commit more becoming more comfortable with their the coming year.
capital (Fig. 8.5). In December 2016, over current allocations to natural resources,
a quarter of respondents had planned with the majority planning to maintain Direct investments and co-investments
to invest more in 2017; those that did their allocations in both the short and long continue to gain traction among investors,
are likely satisfied with their investments term. as significant proportions (48% each) plan
so far, as 81% of investors are planning to increase their investments in these
to commit at least the same amount of Preqin data shows that the majority of areas in the next 12 months (Fig. 8.8).
capital in 2018. forthcoming commitments will continue
to be smaller in size, with 47% of active
Fig. 8.5: Investors’ Expected Capital Commitments to Natural

Resources Funds in the Next 12 Months Compared to the Fig. 8.6: Investors’ Intentions for Their Natural Resources
Previous 12 Months, 2016 vs. 2017 Allocations in the Longer Term, 2016 vs. 2017
100% 100%
11% 10%
90% 90% 19%
26%
80% 80%
More Capital
Increase
70% 70%
Allocation
60% 60%
70% Same Amount 72% Maintain
50% 50% 58%
52% of Capital Allocation
40% 40%
Less Capital Decrease
30% 30%
Allocation
20% 20%
10% 22% 19% 10% 23%

18%
0% 0%
Fig. 8.7: Amount of Fresh Capital Investors Plan to Invest in Fig. 8.8: Investors’ Intentions for Their Natural Resources
Unlisted Natural Resources Funds over the Next 12 Months Allocations in the Next 12 Months by Structure
Separate Accounts 10% 90%
8%
Direct Investments 48% 52%
Less than $50mn Co-Investments

20% 48% 52%
$50-99mn
47% Listed Funds 33% 67%
$100-349mn
Open-Ended Funds 40% 60%
$350mn or More
Closed-End Funds 43% 55% 2%
25%
0% 20% 40% 60% 80% 100%
Increase Allocation Maintain Allocation Decrease Allocation
Source: Preqin Natural Resources Online Source: Preqin Investor Interviews, December 2017

KEY ISSUES IN 2018

I nvestors’ perception of the top three key
issues facing the industry has shifted
since the end of 2016, when uncertainty in
Fig. 8.9: Investor Views on the Key Issues for Natural Resources in 2018
Performance 27%
Commodity Pricing 27%
global markets (41%), performance (41%)
and the exit environment (30%) were cited Volatility/Uncertainty in Global Markets 25%
by the largest proportions of investors. Regulation 14%

Investors now identify performance (27%) Public Perception of Industry 14%
and commodity pricing (27%) as the top Valuations 14%
issues for the asset class in 2018 (Fig. 8.9). Fees 10%
Performance, as previously discussed, Exit Environment 6%
seems to be a longer-term concern, with Interest Rates 5%
investors wary of managers’ ability to Deal Flow 5%
continue to meet or exceed expectations Portfolio Management 3%
in the future. Availability/Pricing of Debt Financing 3%
0% 5% 10% 15% 20% 25% 30%

Commodity pricing has a major impact
on natural resources portfolios, and over Proportion of Respondents
one-quarter of investors agree that it will Source: Preqin Investor Interviews, December 2017
be a key issue for the asset class going

forwards. Across strategies, over half will have an impact on their portfolios INVESTOR VIEWS ON HOW COMMODITY
of investors feel that each of renewable in 2018 is 12 percentage points lower. PRICES WILL AFFECT THEIR NATURAL
energy, timberland and water assets are The largest proportion (46%) of investors RESOURCES PORTFOLIO IN 2018
overpriced (Fig. 8.10). Most investors interviewed at the end of 2017 feel that
believe that assets within agriculture/ commodity pricing will have no effect on
24% 30%
farmland, energy and metals & mining are their natural resources portfolios in the
priced about right, and in some cases are coming year. Overall, almost half (49%) of
relatively cheap. investors expect their natural resources
investments to perform better in the next
On a macro level, commodity price 12 months compared to the previous 12 46%
movements were the factor identified months (Fig. 8.11).
by the most investors as having the Positive
Neutral
biggest impact on their portfolios in 2017,
Negative
although the proportion that believe this
Fig. 8.11: Investor Return Expectations for Their Natural

Fig. 8.10: Investor Views on the Pricing of Natural Resources Resources Investments in the Next 12 Months Compared to the
Assets by Strategy Previous 12 Months, 2016 vs. 2017
100% 3% 100%
90% 17% 15% 18% 17%
16%
Very Cheap 90%

80% 34%
80% 35%
70% 33% 25% Cheap
28%
37% 38% 49%

60% Will Perform
70%
50% About Right Better
34%
60%
40%
Will Perform
30% 42% 44% 53% Expensive 50%
40% 35% About the Same
20% 44%
29% Very Expensive 40%
10% Will Perform
6% 10% 9% 9% 6% 30%
0% 3% 45% Worse
Metals &
Renewable
Timberland
Water
Agriculture/
Conventional
20%
Mining
Farmland
Energy
Energy
10% 21%
6%
0%
Dec-16 Dec-17
Strategy
71
STRATEGIES AND
A s shown in Fig. 8.12, institutional
investors still feel that primary
funds present the best opportunities for
As was the case one year ago, the
largest proportions of natural resources
investors believe that the energy sector,
Two-thirds of investors believe that
North America currently presents the
best investment opportunities in natural
investment. With debt and mezzanine both conventional (44%) and renewable resources, followed by Europe (35%, Fig.
funds rising in prominence as a strategy (44%), provides the best opportunities 8.14). Just under a quarter of investors
across real assets, it is unsurprising that in the current market (Fig. 8.13). Water believe emerging markets provide the
one-fifth of investors identified debt as and agriculture/farmland are viewed as best opportunities for investment and,
providing the best opportunities, a nine- presenting the best opportunities for as Fig. 8.15 shows, just 16% are looking
percentage-point increase from December investment by 26% and 25% of investors to increase their allocation to emerging
2016. respectively. markets in the coming year.
Fig. 8.12: Strategies that Investors View as Presenting the Best Fig. 8.13: Sectors that Investors View as Presenting the Best
Opportunities, 2016 vs. 2017 Opportunities, 2016 vs. 2017
80% 50%
46%
70% 45% 44% 44%
70%
59% 40% 38%

60%
35%
50% 30% Dec-16
Dec-16 25% 26%
40% 25% 22%
Dec-17 20% 19% Dec-17
30% 16% 16% 16%
20% 20% 15% 13%
20% 16% 16% 10%
11% 11%
10% 5%
0% 0%
Metals &
Renewable
Timberland
Water
Agriculture/
Conventional
Mezzanine
Primary
Fund of
Secondaries
Mining
Farmland
Funds
Energy
Energy
Debt/
Fig. 8.14: Regions that Investors View as Presenting the Best Fig. 8.15: Investors’ Expected Change in Their Natural Resources
Opportunities Allocations to Emerging Markets over the Longer Term
North America 66%

2%
Europe 35% No Allocation but
14%
Expect to Invest
Emerging Markets 23%
Increase Allocation
Asia 21%
Maintain Allocation
Latin America 15%
53%
Australasia 13% Reduce Allocation
30%
Africa 10%
No Allocation and Do
Middle East & Israel 3% Not Expect to Invest
1%
0% 20% 40% 60% 80%

FUND TERMS AND

ALIGNMENT OF INTERESTS Fig. 8.16: Extent to Which Investors Believe that Fund Manager and Investor Interests
Fund terms and conditions will always be Are Aligned, 2016 vs. 2017
a key consideration for investors when 100% 2%
looking to put capital to work due to
90%
the effect they can have on net returns
and their role in ensuring their interests 80%
Proportion of Respondents Strongly Agree
are properly aligned with those of fund 70% 56%
managers. The majority (71%) of investors 71%
60% Agree
interviewed by Preqin in December 2017
felt that fund manager and investor 50%
Disagree
interests were properly aligned, an 40%
increase of 13 percentage points from
30% Strongly Disagree
the corresponding proportion at the end
37%
of 2016 (Fig. 8.16). This suggests that, in 20%
26%
a competitive fundraising environment, 10%
managers have listened to and addressed 5%
0% 3%
concerns by adopting terms and
Dec-16 Dec-17
conditions that meet investors’ needs.
AREAS OF CHANGE
Roughly one-third of investors have seen commitments. Nineteen percent of LPs occasionally deciding not to invest
positive changes in prevailing fund terms investors have seen changes over the in a fund due to the proposed terms
and conditions over the past year, likely past 12 months in terms of the amount of and conditions (Fig. 8.18). However, the
a result of the increased competition capital managers commit to a fund, while proportion of investors that have never
for investor capital. As seen in Fig. 8.17, 14% and 11% would like to see future rejected a fund proposal based on the
increased transparency at the fund level improvement in how performance fees are terms and conditions has doubled to
and management fees are the areas in charged and hurdle rates respectively. 10%. With investors rejecting funds less
which the most investors have both seen frequently based on terms and conditions,
change over the past 12 months and IMPACT ON INVESTMENT DECISIONS it is perhaps a sign that fund managers
believe alignment can still be improved. Attitudes towards fund terms and have done a better job of aligning interests
Fees remain a point of contention as conditions impact a large majority of in initial fund proposals.
they have a material impact on the net investors’ decisions as to whether to
returns investors see from their capital invest in a specific fund, with 80% of
Fig. 8.17: Areas in Which Investors Have Seen a Change in Fig. 8.18: Frequency with Which Investors Have Decided Not to
Prevailing Terms and Conditions over the Past 12 Months and Invest in a Fund Due to the Proposed Terms and Conditions,
Where They Believe Alignment Can Be Improved 2016 vs. 2017
35% 31% 100%
5%
30% 29% Have Seen 10%
90%
Changes in
Proportion of
25%
Respondents
21% Past 12 Months 80%

20% 19% 19%
Never Decided
15% 14% 70% Not to Invest
11% 11% Believe
10% 8% Alignment Can 60%
6% 6% 6% 6% 71%
5% 5% 6% 3% Be Improved Occasionally Decided
50% 80%
0% Not to Invest
40%
Lock-up Period
Manager Commitment

How They Are Calculated
Management Fees
Hurdle Rate
More Transparency
at Fund Level
30% Frequently Decided

Amount
Not to Invest
to a Fund
20%
10% 23%
10%
0%
Dec-16 Dec-17
73

SELECT NATURAL RESOURCES FUNDS
I n our December 2017 interviews with over 80 institutional investors, 18% revealed that they found it more difficult to identify attractive
natural resources fund opportunities in 2017 than in 2016, and 76% saw no change. With this in mind, we examine in more detail the
processes that investors use to source and screen funds.
KEY STATS: AVERAGE SCREENING PROCESS FOR NATURAL RESOURCES FUNDS

■■ Only internal sourcing (29%) 241
Natural Resources
■■ Mainly internal or consultant
recommendations, with some external Funds in Market
approaches (18%)
■■ Mix of internal and external
recommendations (45%)
KEY REASONS FOR REJECTING A GP:
88
88
Lack of firm track record (45%)
88
Unfavourable fees/fund terms (45%) Investors Screen
185 Less than

Funds Each Year
9
of These Funds
Reach Second-
99
Team track record (61%) Round
99
Team strategy experience (58%) Screening
99
Firm track record (55%)
Investors
Commit to
1-2
Funds Each
Year

record 48%

terms 28%

17%

17%

SAMPLE NATURAL RESOURCES

4
3
5
1
7 8
2
6
9
1 2 3
CITY OF PHOENIX EMPLOYEES’ AFORE PROFUTURO NORTH SKY CAPITAL
RETIREMENT SYSTEM Type: Private Sector Pension Fund Type: Private Equity Fund of Funds
Type: Public Pension Fund Location: Mexico City, Mexico Manager
Location: Phoenix, US AUM: MXN 426bn Location: Minneapolis, US
AUM: $2.3bn Plan: Plans to opportunistically approach AUM: $1.2bn
Plan: Recently established a 4% target fund managers in the asset class over the Plan: Will commit to four or five new
allocation to natural resources, and began next 12 months, with a preference for natural resources funds over the next 12
a search for managers in late 2017. The targeting the Mexican timber and energy months. Will look to deploy up to $100mn
number of managers to be hired and markets. and will continue to target North America-
the specific mandates have not been focused energy and water opportunities.
determined.
4 5 6
AEVWL PREVAER FONDO PENSIONE LIBERTY GROUP
Type: Public Pension Fund Type: Private Sector Pension Fund Type: Insurance Company
Location: Munster, Germany Location: Rome, Italy Location: Johannesburg, South Africa
AUM: €12.5bn AUM: €410mn AUM: ZAR 688bn
Plan: Will make new investments over the Plan: Will consider making further Plan: Will invest on an opportunistic basis
next 12 months, specifically in unlisted investment in European renewable energy in the renewable energy sector in the next
energy and timberland funds targeting throughout 2018, as part of its ongoing 12 months. Will consider both unlisted
Europe and North America. Typically private equity and infrastructure strategy. funds and direct investments in South
commits €30mn per fund. Invests in the region solely via unlisted Africa.
funds.
7 8 9
FTLIFE INSURANCE COMPANY CID GROUP AUSTRALIAN NATIONAL UNIVERSITY
Type: Insurance Company Type: Private Equity Firm ENDOWMENT FUNDS
Location: Hong Kong Location: Taipei, Taiwan Type: Endowment Plan
AUM: $3bn AUM: $1bn Location: Acton, Australia
Plan: Will invest solely via unlisted funds Plan: Seeks exposure to the asset class via AUM: AUD 1.5bn
over the next 12 months on a global basis. unlisted funds and will focus on the energy Plan: Open to direct investments and
Is interested in the energy and metals sector across Asia and Greater China over commitments through unlisted funds.
& mining industries, including the oil, 2018. Will focus on brownfield assets and
renewable energy, base and precious environmentally friendly industries
metals sectors. including renewable energy.
75
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up-to-date contact information for key personnel. Find out more:
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PREQIN INVESTOR OUTLOOK:
ALTERNATIVE ASSETS
H1 2018
PREQIN
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intelligence to achieve their objectives:
■■ Investors: asset allocation, manager selection and portfolio management

■■ Fund managers: fundraising, portfolio monitoring and investor relations
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■■ The wider alternative assets industry: insight, understanding and information
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PREQIN

3: VENTURE CAPITAL Sample Infrastructure Investors to Watch 58

Investor Activity in 2018 22 Introduction 60

Key Issues in 2018 23 Satisfaction with Private Debt 61

Strategies and Geographies Targeted 24 Investor Activity in 2018 62

In Focus: Investing in Venture Capital 25 Key Issues in 2018 63

Investor Outlook on Fees 32 Introduction 68

Investor Activity in 2018 34 Satisfaction with Natural Resources 69

Emerging Trends 36 Investor Activity in 2018 70

Sample Hedge Fund Investors to Watch 38 Strategies and Geographies Targeted 72

DATA PACK FOR PREQIN INVESTOR OUTLOOK: ALTERNATIVE ASSETS, H1 2018

To download the data pack, please visit: www.preqin.com/investoroutlook

RESPONDENTS BY INVESTOR LOCATION RESPONDENTS BY INVESTOR TYPE

EUROPE FAMILY OFFICE

13% ASSET MANAGER

2 © Preqin Ltd. 2018 / www.preqin.com

None One Two Three Four Five Six

20% 15% 13% 15% 15% 12% 10%

PROPORTION OF INSTITUTIONAL INVESTORS ALLOCATING TO EACH ALTERNATIVE ASSET CLASS

58% 50% 59% 36% 37% 40%

Source: Preqin Online Products

INSTITUTIONAL INVESTORS IN ALTERNATIVE ASSETS BY TARGET ALLOCATION TO EACH ASSET CLASS

24-HOUR CLIENT SUPPORT

Find out more about our products and services:

4 © Preqin Ltd. 2018 / www.preqin.com

Performance Expectations over

Infrastructure Fallen Short

Private Debt Worse About the Same Better

Performance Expectations for Next 12 Months

Source: Preqin Investor Interviews, December 2017

INSTITUTIONAL INVESTORS’ PLANS FOR THE COMING YEAR

8% Private Equity 37%

INSTITUTIONAL INVESTORS’ PLANS FOR THE LONGER TERM

4% Private Equity 53%

FUND SELECTION AND

Harder to Find Attractive Investment Easier to Find Attractive Investment

50% Private Equity 3%

AVERAGE NUMBER OF COMMITMENTS INSTITUTIONAL INVESTORS MAKE PER YEAR

3.5 1.7 2.4 1.9 1.7 2.2 1.5

AVERAGE NUMBER OF MARKETING DOCUMENTS INSTITUTIONAL INVESTORS RECEIVE PER MONTH

Source: Preqin Investor Interviews, December 2017

Hedge Funds Mostly Meet

6 © Preqin Ltd. 2018 / www.preqin.com

FUND TERMS AND

Source: Preqin Investor Interviews, December 2017

Change in Favour of Fund Manager Change in Favour of Investor

27% Private Equity 29%

Real Estate Occasionally

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APPETITE PERSISTS DESPITE

KEY ISSUES INVESTOR SATISFACTION FUTURE PLANS

10 © Preqin Ltd. 2018 / www.preqin.com

Fig. 2.2: Extent to Which Investors Feel Their Private Equity

10% 13% 10%

49% +4.1% and over

INVESTOR ACTIVITY IN 2018

Fig. 2.5: Investors’ Expected Capital Commitments to Private

10% 10% 19%

Fig. 2.8: Investors’ Expected Change in the Number of Fund

Q3 2018 Same Number of