The year 2019 was full of macroeconomic and geopolitical challenges, but the global private equity (PE) industry has still got reasons to celebrate. According to Preqin, a provider of data on investments in alternative assets, PE fundraising surpassed $500 billion for the fourth consecutive year in 2019.

In the recently released 2020 Preqin Global Private Equity and Venture Capital Report, the London-headquartered firm said although the total number in 2019 was slightly lower than the previous year, the average fund size grew; and the average time spent in the market decreased to 13 months—the lowest level ever seen. This, according to Preqin, has helped the industry’s assets under management (AUM) cross the $4-trillion mark.

“Private equity’s enormous expansion seems to be accelerating. The industry is on course to add almost a trillion dollars a year for the next five years, an astonishing rate of growth,” says Christopher Beales, executive editor of the report. “Investor demand has been strong and sustained, and fund managers have been able to offer them robust returns even in a low-interest environment, fuelling a virtuous cycle of growth,” Beales adds.

In 2019, PE fundraising reached $595 billion, with 1,316 funds closed. This was a marked decline compared to 2018 when 1,790 funds were closed, securing an aggregate $628 billion. In terms of venture capital (VC) funds, 2019 saw the statistic rise—$139 million compared to $127 million in 2018. For buyout funds, too, the average size grew to $1.57 billion from $1.02 billion over a year.

With the industry AUM burgeoning, challenges are also rising. “The fundraising marketplace is more crowded than ever before, making it difficult for fund managers to stand out, and for investors to find the right funds,” says Beales, adding deal-making is equally challenging as high asset pricing is putting pressure on future returns. “The industry is fundamentally strong but 2020’s waters will be tricky to navigate,” Beales warns.

So far the global risk environment is reasonably helping the industry. The asset class is benefiting in part from widespread anticipation of a market downturn among both fund managers and investors. “Almost nine out of 10 investors expect to maintain or increase their allocations in 2020 and almost half of fund managers think the position of the market cycle will have a big impact on PE in the months ahead,” according to Preqin.

Preqin also said fund managers have record amounts of capital to put to work, as 58% of them expect to invest more in 2020 compared to 2019 even though market conditions could get still tougher. Because 62% of fund managers and 61% of investors believe they are currently at the peak of the cycle, according to Preqin. “If the cycle turns and managers are faced with a recession, the task of maintaining the kind of returns that investors expect from the asset class becomes even more difficult,” says Preqin. This will test the mettle of the best performers. “Investors will be watching closely to determine which firms are able to flourish in bad times as well as good,” Preqin adds.

As the investor universe has expanded—at the rate of $2.4 billion a day in 2019—so has the number of fund managers. There are more than 18,000 fund managers currently offering a PE product, up from 16,400 in 2018. Clearly, the hyper-growth in the industry could mean a problem of plenty at a time when the AUM is projected to touch $5 trillion by end-2022.

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