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Market volatility and macroeconomic risk have made it harder for private equity firms to close deals and raise money, leading to a more pessimistic outlook than last year, according to a report from S&P Global Market Intelligence.

Still, the report showed more than half of limited partner (LP) firms surveyed for S&P’s 2023 private equity outlook expect private equity to be the top-performing alternative asset class this year.

Private equity has emerged as the top alt holding for LPs, the report said, with more than half of firms citing it as their primary allocation.

More than four in 10 (43%) LPs investing in private equity said they would increase their allocation this year, while venture capital and private debt are likely to see a decrease.

Expectations remained solid even as LPs said interest rates and inflation could negatively impact returns this year, and so could a decline in private equity exits.

Private markets held up far better than public securities last year, when stocks and bonds suffered as central banks aggressively raised interest rates to try to bring inflation under control.

Fund companies have been making private equity and other alternative investments more accessible to retail investors, but those surveyed showed little concern about the effect of opening private equity funds to lower-threshold investors.

Roughly half of LPs had concerns about secondary fund restructuring, or continuation funds, citing potential conflicts of interest.

More than two-thirds of LPs (67%) said they plan to stick with their general partner (GP) selection strategy this year.

On the GP side, almost one-quarter of firms surveyed (24%) said they expect deal activity to deteriorate this year. That compares to only 7% in the previous year’s survey, which was conducted before steep interest rate hikes and Russia’s invasion of Ukraine. This year’s survey was conducted in December and early January.

Roughly four in 10 GPs said deal activity will improve this year, down from 56% a year earlier. Large private equity firms with more than US$10 billion in assets under management were more pessimistic than smaller firms.

Almost half of GPs (45%) also expect fundraising to deteriorate this year, up from just 12% last year. Roughly one in three GPs believe conditions will remain the same (35%) or improve (34%).

Venture capital firms were more optimistic, with a majority regardless of firm size believing there will be more deal activity this year. Thirty-five percent expect fundraising conditions to deteriorate or remain the same, with 30% saying fundraising will improve.

The biggest challenge for venture fundraising will be LPs decreasing their asset allocation, the report said.

When it comes to sectors for investment this year, clean energy (48%) led the way for private equity firms, followed by health tech, business-to-business (B2B) software as a service (SaaS), and robotics and process automation. Health tech (39%) was top for venture firms, followed by clean energy, B2B SaaS, and fintech and payments.

S&P surveyed 511 private equity, venture capital and limited partner respondents between December 2022 and January 15, 2023.