Preqin Investor Outlook Alternative Assets H1 2017

PREQIN
INVESTOR OUTLOOK:
ALTERNATIVE ASSETS
H1 2017
Private Equity Hedge Funds Real Estate Infrastructure
Private Debt Natural Resources
alternative assets. intelligent data.

1. ALTERNATIVE ASSETS
CONTENTS
Foreword 2 5: INFRASTRUCTURE
Introduction 42
1: ALTERNATIVE ASSETS Satisfaction with Infrastructure 43
Keynote Address - Amundi 4 Evolution of the Investor Universe 44
Participation in Alternative Assets 6 Investor Activity in 2017 46
Performance Expectations 7 Key Issues in 2017 48
Fund Terms and Alignment of Interests 8 Appetite for Alternative Structures 49
Fund Selection and Marketing 10 How Investors Source and Select Infrastructure Funds 50
2: PRIVATE EQUITY 6: PRIVATE DEBT

Introduction 12 Introduction 52
Satisfaction with Private Equity 13 Satisfaction with Private Debt 53
Investor Activity in 2017 14 Evolution of the Investor Universe 54
Strategies and Geographies Targeted 15 Investor Activity in 2017 57
Key Issues in 2017 16 Sample Private Debt Investors to Watch in 2017 59
Fund Terms and Alignment of Interests 17 How Investors Source and Select Private Debt Funds 60
Sample Private Equity Investors to Watch in 2017 18
How Investors Source and Select Private Equity Funds 19 7: NATURAL RESOURCES
Introduction 62
3: HEDGE FUNDS Satisfaction with Natural Resources 63
Introduction 22 Key Issues in 2017 64
Satisfaction with Hedge Funds 23 Investor Activity in 2017 65
Key Issues and Redemptions 24 Strategies and Geographies Targeted 66
Fees and Alignment of Interests 26 Sample Natural Resources Investors to Watch in 2017 67
Investor Activity in 2017 28 How Investors Source and Select Natural Resources Funds 68
How Investors Source and Select Hedge Funds 30
4: REAL ESTATE
Introduction 32
Satisfaction with Real Estate 33
Evolution of the Investor Universe 34
Investor Activity in 2017 36
Key Issues in 2017 37
Appetite for First-Time Funds and Alternative Structures 38
How Investors Source and Select Real Estate Funds 39
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1
PREQIN INVESTOR OUTLOOK: ALTERNATIVE ASSETS, H1 2017
FOREWORD
T he alternative assets industry is bigger than ever, with more than $7.7tn in hedge fund and private capital assets managed globally,
having grown by $300bn during 2016. Participation in multiple alternative asset classes is now the norm for the majority of
institutional investors, with alternatives portfolios becoming more and more diverse.
Institutional investors face a number of challenges today. While the performance of most private capital funds in 2016 met or exceeded
investors expectations, there are concerns about asset pricing and whether strong performance can be maintained. Returns from hedge
funds improved in 2016 but most investors still reported that hedge fund performance fell short of their expectations, with performance
and fees remaining key concerns. The more turbulent geopolitical landscape we see today only creates further uncertainty.
Most investors remain below their long-term target allocation to alternatives, and so have capital to put to work, but across alternative
asset classes respondents stated it is harder to find attractive opportunities now than a year ago. There are almost 18,000 alternatives
funds open for investment, but for investors, finding the true outperformers is a difficult prospect, particularly when the majority are
finding that the marketing documents they receive are not meeting their needs.
For fund managers, standing out amid the unprecedented level of competition is a challenging prospect, and it is more important than
ever to understand the changing requirements of the investor community. This report brings together the results of a series of in-depth
interviews with over 500 institutional investors, conducted by Preqins analysts for the latest editions of the Preqin Global Alternatives
Reports. We hope it helps provide insight into institutional investors portfolios and future plans, their confidence in different asset
classes and the challenges they face.
Preqins online services are indispensable fundraising and investor relations tools 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
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RESPONDENTS BY INVESTOR LOCATION RESPONDENTS BY INVESTOR TYPE
NORTH AMERICA PUBLIC PENSION FUND

16%
EUROPE
49%
33% 16% FAMILY OFFICE
14% PRIVATE SECTOR PENSION FUND

ASIA-PACIFIC
10% 13% ASSET MANAGER
7% INSURANCE COMPANY
7% ENDOWMENT PLAN
5% FOUNDATION
REST OF WORLD 5% INVESTMENT COMPANY
5% BANK
8%
13% OTHER
2 Preqin Ltd. 2017 / www.preqin.com

SECTION ONE:
ALTERNATIVE ASSETS
INVESTORS WANT GREATER

TRANSPARENCY AND BETTER SOURCING
OF REAL AND ALTERNATIVE ASSETS
- Pedro Antonio Arias, Amundi
D espite strong institutional investor

appetite for real and alternative
assets, there are concerns over
This is easier for the larger global players
as they have the necessary economies
of scale to support a low or zero capital
one of two mistakes. Under pressure, they
either pay too much for high-quality assets
because these deals are overcrowded
transparency and the ability of managers committed fee while they source deals. or they act too quickly and buy assets that
to source these assets at a fair price, as Smaller fund managers, however, could look cheap but are low quality.
evidenced by Preqins most recent annual find this challenging.
survey. INVESTORS NEED A MANAGER THAT
Asset managers need to be wary of CAN TAKE A DIFFERENT APPROACH TO
Institutional investors want fund complacency while there is a strong SOURCING REAL AND ALTERNATIVE
managers to cover the basic transparency demand for real and alternative assets ASSETS
requirements, such as communicating in the current market environment, To avoid the cardinal mistake of investing
their investment strategy clearly as well as institutional investors will not allocate in an illiquid asset at the wrong price,
providing detailed performance data and capital unless the fee structures are clear investors will need to find those managers
information about their team. and equitable. that are able, despite market pressures, to
source fairly priced assets.
But they are also keen to have more clarity THERE ARE CONCERNS OVER SOURCING
on the real cost of investing in alternative AND VALUATION Different managers have different skills
assets such as private equity, infrastructure Transparency is not the only concern this is especially true for illiquid real and
and real estate. The survey showed that fee institutional investors have over these alternative assets, where access to fairly
structure is a key investor concern. assets limited supply is creating sourcing priced assets is the key to delivering the
and valuation challenges. target returns to investors.
A MORE STANDARDIZED APPROACH TO
FEE STRUCTURE IS REQUIRED According to the Preqin survey, while the Specialist managers have deep
It behoves managers to address concerns majority of institutional investors have understanding of specific markets such
over fee structures and alignment of a positive perception of private equity, as real estate or leveraged buyouts but
interests. In recent years, there has been infrastructure and real estate, a significant lack scale. These managers struggle to
a strong focus from institutional investors proportion had concerns over the pricing meet the pressure from investors to source
on fee structures of more traditional asset and valuations of these asset classes. good-quality assets quickly. These firms
classes and attention will now be switched struggle to provide a capital invested fee
to the more opaque and more expensive The report showed that while 84% of model as it leaves them lacking financial
fee structures of alternative asset funds. investors were positive about private resource while searching for deals.
equity, 70% have concerns about pricing
For example, investors want to know and valuation. Similar patterns emerged In contrast, global players have the
whether they pay fees on the capital they for real estate: 50% were optimistic about financial strength and a worldwide
have committed or the capital that has the outlook but 68% concerned about network of partners, including banks, but
been invested. If investors are paying sourcing. And 44% of investors had a often lack local knowledge.
fees on capital committed and the fund positive perception of infrastructure, while
struggles to source assets, investors can 54% were concerned about pricing and LOCAL KNOWLEDGE AND GLOBAL
end up paying high fees for effectively valuation. CONNECTIONS ARE KEY
keeping their cash on deposit. The ideal asset manager in the private
These concerns are a reflection of the markets world needs to combine the
This problem could be resolved if the fee structure currently operated by most advantages of both a specialist manager
general partners of private market funds managers. If managers can collect fees and a global player.
were to develop a more standardized from the capital committed rather than
approach to fee structures. There is already the capital invested, there is no incentive Amundi could be classed as a glocal
a trend for fees to be paid on capital to invest quickly. company. We are a global player
invested rather than on capital committed covering all asset classes including
and we believe this should become When investors get frustrated with this traditional equities and bonds as well as
standard practice. process, managers respond by making alternatives but we also have a specialist

understanding of European assets and These local banks introduce asset local companies. The current low return
markets. managers to small and medium-sized environment is driving investor demand
enterprises looking for private debt for these high-yield, inflation-linked
The European market remains highly and equity investors. And if a family-run returns these deals provide. And supply
fragmented where local knowledge and business is looking for private financing to is growing, as companies look for a new
contacts are vital. Amundi is the largest fund an Asian expansion, then our global source of finance as banks are less able to
asset manager in the region and has long- reach helps the firm to achieve this goal. provide loans.
term business and banking connections
which give us access to assets and deals AIMING TO OVERCOME TRANSPARENCY Asset managers have a central role to play
that rivals struggle to find. AND SOURCING ISSUES in this trend, which we think will persist
Transparency and sourcing issues in over the medium term.
At the same time, covering a wide breadth private markets mean only asset managers
of asset classes creates synergies between that can take advantage of a global
our specialized teams, enabling us to scale and a local footprint can align their
discover new investment opportunities interests more closely with those of
and to source deals. For example, there are investors. Only glocal managers, rather
synergies between Amundis 500bn fixed than boutique specialist players, can
income and 9bn private debt businesses. ensure investors get access to good deals
at fair value, and soon after the capital is
A good illustration of this glocal ability is committed.
when asset managers benefit from deep
connections with a large network of local Asset managers with global scale and
banks throughout a region, for example, local knowledge are perfectly positioned
in Europe. to work with banks to provide finance to
AMUNDI
Publicly traded since November 2015, Amundi is the largest European Asset Manager in terms of AUM, with over 1,000bn worldwide
(*). Headquartered in Paris, France, Amundi has six investment hubs located in the worlds key financial centres, and offers a
combination of research depth and market experience that has earned the confidence of its clients. Amundi is the trusted partner of
100 million retail clients, 1,000 institutional clients and 1,000 distributors in more than 30 countries, and designs innovative, high-
performing products and services for these types of clients tailored specifically to their needs and risk profile.
End of September 2016 Amundi has created a dedicated platform for real and alternative assets. Real estate, private debt, private
equity, infrastructure and alternative multi-management are now all part of a single integrated business line, bringing together some
200 experts in origination, structuring and management of these asset classes worth more than 36bn in assets under management
(**). Through this new platform, Amundi offers institutional or individual investors the opportunity to directly invest in the full range
of real assets through dedicated or commingled vehicles (funds, co-investment, multi-management or advisory mandates).
PEDRO ANTONIO ARIAS

Pedro Antonio Arias joined Amundi in July 2013 to manage the alternative assets business line: Pedro Antonio oversees the Private
Equity, Real Estate, Infrastructure investments and assets, and co-manages the private debt. He was previously Deputy CEO in charge
of international development and real estate at the Casino group, the French retail Group. Pedro Antonio started his career in a law
firm before moving to corporate and investment banking in various leading institutions. Pedro Antonio was notably involved in
mergers and acquisitions across Europe and Latin America and eventually in co-head of the restructuring practice at Rothschild & Cie
for Europe. Pedro graduated from ESSEC business school and Paris-Descartes University (Law degree).
www.amundi.com
(*) Amundi figures as of 30 September 2016. No.1 European asset manager based on global assets under management (AUM) and the main headquarters being based in Continental
Europe - Source IPE Top 400 asset managers published in June 2016 and based on AUM as at December 2015.
(**) As at 31 December 2016.
5
PARTICIPATION IN
ALTERNATIVE ASSETS
INSTITUTIONAL INVESTORS BY NUMBER OF ALTERNATIVE ASSET CLASSES INVESTED IN
None One Two Three Four Five Six
20% 16% 14% 16% 14% 11% 9%

PROPORTION OF INSTITUTIONAL INVESTORS ALLOCATING TO EACH ALTERNATIVE ASSET CLASS
Private Hedge Real Private
Infrastructure Natural Resources
Equity Funds Estate Debt
57% 51% 61% 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 Respondents
INSTITUTIONAL INVESTORS PLANS FOR ALLOCATIONS IN THE LONGER TERM
Reduce Allocation Increase Allocation
6% Private Equity 48%

31% Hedge Funds 15%
10% Real Estate 36%
11% Infrastructure 53%
8% Private Debt 62%
23% Natural Resources 19%

PERFORMANCE EXPECTATIONS
INSTITUTIONAL INVESTORS GENERAL PERCEPTION OF INSTITUTIONAL INVESTOR VIEWS ON ALTERNATIVE ASSETS
ALTERNATIVE ASSET CLASSES PERFORMANCE
Exceeded
Performance Expectations in Previous

Private Equity
Hedge Funds
12 Months
Met
Real Estate
Infrastructure
Private Debt Fell Short
Worse About the Same Better

Natural Resources
Performance Expectations in Next 12 Months
Positive Neutral Negative
INSTITUTIONAL INVESTORS PLANS FOR THE COMING YEAR

Invest Less Capital than in Past Invest More Capital than in Past
12 Months 12 Months

38% Hedge Funds 20%
25% Real Estate 24%
11% Private Debt 57%
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7
FUND TERMS AND ALIGNMENT

OF INTERESTS
PROPORTION OF INSTITUTIONAL INVESTORS THAT FEEL FUND MANAGER AND INVESTOR INTERESTS ARE PROPERLY ALIGNED
Hedge Real Private Natural

Private Equity Infrastructure
Funds Estate Debt Resources
66%
32%
69 %
61 %
63 %
59 %
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

5% Hedge Funds 58%
7% Real Estate 31%
9% Private Debt 25%
FREQUENCY WITH WHICH INSTITUTIONAL INVESTORS HAVE DECIDED NOT TO INVEST IN A FUND DUE TO THE PROPOSED
TERMS AND CONDITIONS
Private Equity
Hedge Funds Frequently
Real Estate
Occasionally
Infrastructure
Private Debt Never
Natural Resources
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
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The No. 1
European Asset Manager
YOUR
INVESTMENT
MANAGER
YOUR
TRUSTED
PARTNER
amundi.com
Amundi perimeter - No. 1 European asset manager based on global assets under management (AUM) and the main headquarters being based in continental Europe - Source IPE Top
400 asset managers published in June 2016 and based on AUM as at December 2015. This material does not constitute an oer to buy or a solicitation to sell, nor does it constitute
public advertising for any product, nancial service or investment advice. The value of an investment and any income from it can go down as well as up and outcomes are not guaranteed.
Investors may not get back their original investment. Promotional material issued by Amundi Asset Management, Socit Anonyme with a registered capital of 746,262,615 - Portfolio
Manager regulated by AMF under number GP 04000036 - Registered oce: 90 boulevard Pasteur, 75015 Paris, France - 437 574 452 RCS Paris - amundi.com - January 2017. |
FUND SELECTION AND

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

42% Hedge Funds 8%
53% Real Estate 6%
31% Private Debt 9%
AVERAGE NUMBER OF COMMITMENTS INSTITUTIONAL INVESTORS MAKE PER YEAR

Private Equity Hedge Funds Real Estate Infrastructure Private Debt Natural Resources
AVERAGE NUMBER OF MARKETING DOCUMENTS INSTITUTIONAL INVESTORS RECEIVE PER MONTH

Private Equity Hedge Funds Real Estate Infrastructure Private Debt Natural Resources
20
17 17
13 14 13
INSTITUTIONAL INVESTOR VIEWS ON THE FREQUENCY WITH WHICH MARKETING DOCUMENTS MEET THEIR NEEDS
Private Equity Always Meet

Needs
Hedge Funds
Mostly Meet
Real Estate Needs
Infrastructure Mostly Fail to

Meet Needs
Private Debt
Always Fail to
Natural Resources Meet Needs
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

SECTION TWO:
PRIVATE EQUITY
POSITIVE BEGINNINGS FOR

2017
A s we move into the first half of 2017,
institutional investor sentiment
towards private equity is more positive
believe private equity has fallen short
of expectations is at its lowest over the
period 2011-2016.
Nevertheless, despite these concerns,
investors remain highly satisfied with
the asset class and plan to invest greater
than ever. Among institutional investors sums of capital in private equity in order
in private equity interviewed by Preqin in Investors do have some concerns, to maintain or increase their allocations.
December 2016, 84% reported a positive however, about whether this strong Forty percent of investors reported that
view of the asset class, up from 59% two performance can be maintained. In they would be investing more capital in
years ago. Recent years have seen strong particular, they remain concerned the asset class over the next 12 months
performance which has, in turn, led to high about high valuations, as cited by 70% than during the past 12 months, while
distributions: $257bn was distributed from of respondents, and the risk that fund 48% plan to increase their allocations
private equity funds in H1 2016 (the most managers may be overpaying for assets over the longer term. As they make their
recent date for which data is available) which could be difficult to realize if investment plans for the first half of the
following a record $472bn in 2015. As a prices fall at a later date. Investors also year, these investors continue to identify
result, the vast majority of investors are reported increasing concerns about the small to mid-market buyout funds as the
satisfied with how their investments are exit environment (51% of respondents, up most attractive fund type at present (58%
performing: 95% of investors reported from 24% this time last year) and deal flow of respondents) and a greater proportion
that their private equity portfolios had (41%, up from 34%). plan to increase their allocation to Europe-
met or exceeded expectations over the focused funds than to funds focused on
past 12 months; the proportion that other regions.
SATISFACTION WITH KEY CHALLENGES PLANS FOR 2017

PRIVATE EQUITY
84% 70% 83%

of investors have a positive perception of investors identified valuations as their of investors plan to make their next
of private equity, the greatest proportion leading concern going into 2017. private equity fund commitment in
among alternative asset classes. H1 2017.
48% 45% 58%

of investors plan to increase their of investors are finding it harder of investors identified small to mid-
allocation to private equity over the to source attractive investment market buyout funds as among those
longer term, compared with only 6% opportunities than 12 months ago. presenting the best opportunities at
that plan to decrease it. present.

2. PRIVATE EQUITY
SATISFACTION WITH
PRIVATE EQUITY
I nstitutional investors surveyed by Preqin
in December 2016 expressed a high level
of satisfaction with private equity: 84% of
In terms of longer-term performance,
investors are even more positive: 40%
reported that their private equity
ability of private equity to achieve
portfolio objectives was unchanged or had
increased over the past 12 months.
investors reported a positive view of the investments had exceeded expectations
asset class at present, up from 59% two over the past three years, second only to Investor satisfaction with private equity is
years earlier (Fig. 2.1). private real estate (42%). Despite this, the driving larger sums of capital to the asset
proportion of investors that reported that class as investors look to maintain and
Ninety-five percent of investors reported their confidence in the ability of private increase their allocations. Over the longer
that their private equity fund investments equity to achieve portfolio objectives term, almost half (48%) of respondents
had met or exceeded expectations in had fallen over the past year increased plan to increase their allocations to private
2016, including 24% for which they had from 9% to 14% (Fig. 2.3), possibly due to equity, while a further 46% will maintain
exceeded expectations (Fig. 2.2). The 5% concerns about whether fund managers their allocations these are some of the
that felt that their investments had fallen can continue to deliver strong returns at highest levels seen over the past six years
short of expectations was the smallest a time of high valuations. Nevertheless, (Fig. 2.4).
proportion in the past six years. the vast majority (86%) of fund managers
reported that their confidence in the
Fig. 2.1: Investors General Perception of the Private Equity Fig. 2.2: Investor Views on Private Equity Portfolio Performance
Industry, 2014 - 2016 over the Past 12 Months Relative to Expectations, 2011 - 2016
100% 100%
6% 11% 13% 17%
90% 90% 24%
30%
80% 80%
59% Exceeded
70% 70%
65% Positive Expectations
60% 60%
84% 75%
Neutral 74% Met
50% 50% 77%
75% Expectations
40% 40% 64% 71%
Negative
Fallen Short of
30% 30%
Expectations
33%
20% 29% 20%
10% 13% 10% 19% 15% 11%

9% 6% 8% 6% 5%
0% 3% 0%
Dec-14 Dec-15 Dec-16 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
Source: Preqin Investor Interviews, December 2014 - December 2016 Source: Preqin Investor Interviews, December 2011 - December 2016
Fig. 2.3: Investors Change in Confidence in the Ability of Private

Equity to Achieve Portfolio Objectives over the Past 12 Months, Fig. 2.4: Investors Intentions for Their Private Equity Allocations
2015 vs. 2016 over the Long Term, 2011 - 2016
100% 100%
10%
90% 18% 90%
27%
33% 36%
80% 80% 39%
48%
52%
70% Increased 70% Increase

Confidence Allocation
60% 60%
76% No Change in 50% Maintain
50%
74% Confidence Allocation
61% 48%
40% 40% 49%
Reduced 53% Decrease
30% 30% 46%
Confidence 43% Allocation
20% 20%
10% 10% 19% 16%

14% 12% 8%
9% 6% 6%
0% 0%
Dec-15 Dec-16 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
13
INVESTOR ACTIVITY IN 2017

P ositive investor sentiment towards
private equity is set to lead to further
investment in the asset class in the year
private equity in the next year, over three-
quarters (76%) plan to make their next
commitment in Q1 2017 and 7% intend to
that intend to make just one or two
investments has fallen from 34% to 26%
over the same period.
ahead, as 40% of investors plan to commit do so in Q2 (Fig. 2.6). A further 11% plan to
more capital to private equity funds in invest in the second half of the year, with However, despite investing across
the next 12 months than they did over only 6% expecting to wait until 2018 or a larger number of vehicles, for the
the past 12 months (Fig. 2.5). Although later for their next commitment. majority of investors, the intended capital
this represents a small decrease from 43% commitment to the asset class remains
in December 2015, the proportion that Investors are increasingly spreading their small: 52% of investors plan to invest less
plan to invest less capital over the next investment across a number of funds, than $50mn in private equity over the
12 months has also fallen over the same with the proportion of investors that plan next 12 months (Fig. 2.8). Nevertheless,
period, from 13% to 11%. to commit to five or more funds over the a small but important group of investors
next 12 months increasing from 43% in will be making large commitments over
With 89% of investors looking to invest the H2 2016 Investor Outlook to 51% at the coming year: 13% of investors plan to
the same amount or more capital in present (Fig. 2.7). Similarly, the proportion invest $500mn or more in the asset class.
Fig. 2.5: Investors Expected Capital Commitment to Private

Equity Funds in the Next 12 Months Compared to the Previous Fig. 2.6: Timeframe for Investors Next Intended Commitment to
12 Months, 2015 vs. 2016 a Private Equity Fund
100%
90%
6%
3%
80% 43% 40%
8%
70% Q1 2017
More Capital
60% 7% Q2 2017
50% Same Amount
of Capital Q3 2017
40%
45% 49% Less Capital Q4 2017
30%
20% 2018 or Later

76%
10%
13% 11%
0%
Dec-15 Dec-16
Source: Preqin Investor Interviews, December 2015 - December 2016 Source: Preqin Investor Interviews, December 2016
Fig. 2.7: Number of Private Equity Fund Commitments Investors Fig. 2.8: Amount of Fresh Capital Investors Plan to Invest in
Plan to Make over the Next 12 Months Private Equity Funds over the Next 12 Months
13%
26% Less than $50mn
29% 1-2 Investments
7%
$50-99mn
3-4 Investments
52% $100-349mn
5-6 Investments
18%
$350-499mn
7 or More Investments
23% $500mn or More

22%
10%
Source: Preqin Private Equity Online Source: Preqin Private Equity Online

2. PRIVATE EQUITY
STRATEGIES AND
GEOGRAPHIES TARGETED
A s investors seek to commit greater
sums of capital to private equity over
the coming year, they continue to identify
North America is considered the most
promising region for private equity
investment: 61% of investors believe it
21% of investors saw Asia as among the
most favourable regions for private equity
investment. Eighteen percent of investors
small to mid-market buyout funds as the presents the best opportunities at present, plan to increase their allocation to the
most attractive fund type, with 58% of followed by Europe (44%, Fig. 2.10). In region over the coming year, compared
investors believing they present the best terms of allocations, however, a greater with only 5% that plan to decrease it.
opportunities (Fig. 2.9). This is up from proportion of LPs plan to increase their
50% in the H2 2016 Investor Outlook, allocation to Europe (31%) than North Emerging markets and the Rest of World
but remains below the figure for H1 2016 America (25%) over the coming year, region were seen as offering the best
(61%). Venture capital followed, cited by with 4% and 7% planning to reduce their opportunities by 19% and 7% of investors
28% of respondents, although this has allocations to these regions respectively respectively. According to investors
fallen from 36% in June 2016, possibly due (Fig. 2.11). currently active in emerging markets, the
to investor concerns about overinflated most promising countries/regions are
prices for venture capital companies and Outside the established private equity Emerging Asia (41%), China (39%) and
their potential impact on future returns. markets of North America and Europe, India (20%, Fig. 2.12).
Fig. 2.9: Fund Types* that Investors View as Presenting the Best Fig. 2.10: Regions* Investors View as Presenting the Best
Opportunities Opportunities
70%
Small to Mid-Market Buyout 58%
61%
60%
Venture Capital 28%
50%
Large to Mega Buyout 24% 44%
40%
Growth 18%
30%
Fund of Funds 16%
21% 19%
20%
Secondaries 14%
10% 7%
Other 7%
0%
0% 10% 20% 30% 40% 50% 60% 70% North Europe Asia Rest of World Emerging
Proportion of Respondents America Markets
Source: Preqin Investor Interviews, December 2016 Source: Preqin Investor Interviews, December 2016
Fig. 2.11: Investors Plans for their Private Equity Allocations Fig. 2.12: Countries and Regions* within Emerging Markets that
over the Next 12 Months by Region Investors View as Presenting the Best Opportunities
100%
Emerging Asia 41%
90% 18% 20%
25% China
31% 39%
80%
Increase India 20%

70% Allocation
60% Africa 17%
Maintain
50% Latin America 17%
Allocation
68% 77% 75%
40% Middle East 11%
65%
30% Decrease
Allocation Brazil 11%
20%
Central & Eastern Europe 9%
10%
7% Russia 2%
0% 4% 5% 5%
North Europe Asia Emerging 0% 10% 20% 30% 40% 50%
America Markets
*Respondents were not prompted to give their opinions on each fund type/region individually but to name those they felt best fit these categories; therefore, the results display the fund
types/regions at the forefront of investors minds at the time of the survey.
15
KEY ISSUES IN 2017

W hile investor sentiment towards
private equity is positive, there
remain a number of challenges facing
managers to realize their investments
at current valuations. The proportion of
investors citing the exit environment as a
the key factors that investors believe will
affect their private equity portfolios in
the year ahead are stock market volatility
investors in the asset class. High valuations concern increased to 51% from 24% the (49%), low interest rates (41%) and the
for portfolio companies remain the previous year. geopolitical landscape (26%, Fig. 2.15).
number one concern, cited by 70% of
respondents (Fig. 2.13). Combined with Deal flow was also cited by 41% of All of these issues may pose a challenge to
record levels of dry powder and stiff investors, up from 34% in December 2015. investors as they become more ambitious
competition for assets, investors are Forty-five percent of investors reported in their return targets for their private
increasingly concerned about the impact that it has become harder to find attractive equity portfolios. Just under half (49%) of
high pricing will have on returns in future. investment opportunities over the past investors reported that they are targeting
year, compared with only 5% that are returns of 4.1% or more above public
With valuations high, the exit environment finding it easier (Fig. 2.14). markets for their private equity portfolios,
has also become a key issue for the up from 37% in December 2014 (Fig. 2.16).
industry, with investors concerned that In terms of broader macroeconomic
it may become more difficult for fund developments affecting performance,
Fig. 2.14: Investor Views on the Difficulty of Identifying

Fig. 2.13: Investor Views on the Key Issues Facing Private Equity Attractive Investment Opportunities Compared to 12 Months
in 2017 Ago
80%
70%
70%
60% 5%
51%
50%
41% 39%
40% Harder to Find Attractive
33%
29% Opportunities
30% 25%
20% 15% 15% 45% No Change
10%
0%
50% Easier to Find Attractive
Deal Flow
Fees
Volatility/Uncertainty
Valuations
Performance
Regulation
Transparency
Exit Environment
Public Perception of
in Global Markets
Opportunities
Industry
Fig. 2.15: Investor Views on the Macroeconomic Factors that

Had the Biggest Impact on Their Private Equity Portfolios in Fig. 2.16: Investors Return Expectations for Their Private Equity
2016 vs. Predictions for 2017 Portfolios, 2011 - 2016
53% 100%
Low Interest Rates
41%
90%
StockMarketVolatility 42%
49% 37% Public Market
80% 43% 40%
26% 49% +4.1% and over
Currency MarketVolatility
19% 54%
70% 63%
Geopolitical Landscape 24%
26% 60% Public Market
17% +2.1% to +4%
Central Bank Intervention 50%
23%
Brexit Vote 10% 37% Public Market
8% 40% 49%
43% 30% +2%
China Economic Slowdown 7% 30% 29%
10%
25%
Commodity PriceVolatility 4% 20% Same as Public
5% 18% 15% Market
10% 9%
0% 20% 40% 60% 7% 11% 12%
5% 8% 5% 6%
Proportion of Respondents 0% 2% 3%
2016 2017 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
Source: Preqin Investor Interviews, December 2016 Source: Preqin Investor Interviews, December 2011 - December 2016

2. PRIVATE EQUITY
FUND TERMS AND ALIGNMENT

OF INTERESTS
T he alignment of interests between Fig. 2.17: Extent to Which Investors Believe that Fund Manager and Investor Interests
GPs and LPs is an important aspect Are Properly Aligned, 2012 - 2016
of their relationship, and is intrinsically 100%
related to fund terms and conditions. 90%
Sixty-six percent of investors surveyed by
80%
Preqin believe that GP and LP interests
Proportion of Respondents Agree that
are properly aligned, marking the fifth 70%
67% 70% 66% Interests Are
consecutive year of a majority consensus 71%
60% 76% Properly Aligned
(Fig. 2.17). However, this does represent a
four percentage point reduction from the 50%
Disagree that
previous year. 40% Interests Are
30% Properly Aligned
Those investors that are dissatisfied
with the current alignment of interests 20%
33% 30% 35%
29%
identified a number of areas where 10% 24%
improvements can be made (Fig. 2.18).
0%
Management fees are of greatest concern 2012 2013 2014 2015 2016
to LPs (cited by 70% of all respondents),
Source: Preqin Investor Interviews, December 2012 - December 2016
with one respondent stating that
management fees should cover costs in favour of the GP (17%), an indicator 28% of LPs have frequently decided not to
only with no profit. Performance should of the bargaining power that LPs have invest in a fund as a result of the proposed
be based on properly calculated alpha relative to GPs in a competitive fundraising terms and conditions, while a further 64%
generated. Transparency at fund level environment and the efforts made by have occasionally been deterred from
(63%), how performance fees are charged many GPs to address investor concerns. making an investment on this basis (Fig.
(60%) and the amount of performance fees The largest proportion (44%) of surveyed 2.19). With significant competition among
(51%) were also key concerns. LPs saw increased transparency at fund fund managers for investor capital, GPs will
level, while 42% witnessed changes to need to demonstrate their commitment
Although the proportion of investors that management fees and 31% saw changes to improving fund terms for investors, in
are dissatisfied with the alignment of to the GPs commitment to the vehicle. such a way that they address LP concerns
interests has increased slightly from the about alignment of interests, in order
previous year, more LPs (37%) have seen Fund terms and conditions proposed to successfully attract capital for new
changes to fund terms and conditions by GPs can have significant influence on vehicles.
in their favour over the past year than whether an LP decides to invest in a fund:
Fig. 2.18: Investor Views on the Areas of Fund Terms and

Conditions that Have Changed over the Past 12 Months and Fig. 2.19: Frequency with Which Investors Have Decided Not to
that Need to Improve Further in 2017 Invest in a Fund Due to the Proposed Terms and Conditions
80%
70%
70% 63% 60%

60% Have Seen 8%
51% 49%
50% 44% Change Frequently
42% 40%
40% 28% Decided Not to
28% 31%
30% Need to Invest
19% 19% Improve
20% 13%
10% Further Occasionally
Decided Not to
0%
Invest
Increased Transparency
How They Are Charged
Lock-up
Management Fees
GP Commitment
Hurdle Rate
Performance Fees
Period
Performance Fees
to Fund
at Fund Level
Never Decided
Amount
Not to Invest
64%
17
18
SAMPLE PRIVATE EQUITY INVESTORS TO WATCH IN 2017
NEW MEXICO STATE INVESTMENT COUNCIL (SIC) VARMA MUTUAL PENSION INSURANCE COMPANY AP-FONDEN 2
Type: Sovereign Wealth Fund Type: Insurance Company Type: Public Pension Fund
Location: Santa Fe, US Location: Helsinki, Finland Location: Gothenburg, Sweden
Total Assets: $20.6bn Total Assets: 42bn Total Assets: SEK 305bn
Current/Target PE Allocation: 7.9%/12.0% Current/Target PE Allocation: 7.5%/7.5% Current/Target PE Allocation: 5.0%/5.0%
Amount Investing in Next 12 Months: $550-650mn Amount Investing in Next 12 Months: 700mn Amount Investing in Next 12 Months: SEK 1.68-3.36bn
Plans to invest in 5-8 funds across buyout, distressed Will target buyout funds with a focus on North America, Will invest in buyout, fund of funds, growth and venture
debt, fund of funds, growth and venture capital strategies Northern Europe and Asia. capital vehicles on a global scale (except emerging
specifically, in North America, Europe and Asia. markets).
LOS ANGELES COUNTY EMPLOYEES RETIREMENT

ASSOCIATION (LACERA) KOREAN RE
Type: Public Pension Fund Type: Insurance Company
Location: Los Angeles, US Location: Seoul, South Korea
Total Assets: $47.6bn Total Assets: KRW 9.4tn
Current/Target PE Allocation: 9.3%/10.0% Current PE Allocation: 2.0%
Amount Investing in Next 12 Months: $1.5bn Plans to invest in new South Korea-focused private equity
Will commit $1.5bn to buyout, special situations and funds including balanced, buyout and growth vehicles.
venture capital vehicles on a global scale. Typically
commits $100mn per fund.
CORPORACIN ANDINA DE FOMENTO (CAF)

Type: Government Agency KLP ASSET MANAGEMENT CHINA INVESTMENT CORPORATION (CIC)
Location: Caracas, Venezuela Type: Insurance Company Type: Sovereign Wealth Fund
Total Assets: $32.5bn Location: Oslo, Norway Location: Beijing, China
Current PE Allocation: 1.5% Total Assets: NOK 533.1bn Total Assets: $813.8bn
Amount Investing in Next 12 Months: $30mn Current/Target PE Allocation: 1.0%/1.5% Will invest in all types of private equity vehicles on a global
Will invest in new Latin America-focused growth and Amount Investing in Next 12 Months: NOK 1.4-1.9bn scale, including first-time funds.
venture capital funds, specifically in Colombia, Brazil and Plans to invest across 3-6 new buyout, growth and venture
Mexico. capital vehicles focused on Europe, including spin-offs.
DATA SOURCE:
Preqins Private Equity Online tracks over 6,400 institutional investors in private equity, providing detailed information on their plans for investment, allocations, full contact
information for key decision makers and more.
For more information, please visit: www.preqin.com/privateequity
Preqin Ltd. 2017 / www.preqin.com

2. PRIVATE EQUITY
HOW INVESTORS SOURCE AND

SELECT PRIVATE EQUITY FUNDS
45% 48%
of investors believe marketing documents
of investors are finding it harder to source
attractive investment opportunities. fail to meet their needs.
HOW INVESTORS SOURCE FUNDS:
16%
Through internal
26%
Mainly internal
43%
Mix of internal
14%
Mainly approaches
1%
Solely from external
investment team or consultant and external from GPs or marketers, approaches
recommendations, some recommendations some internal
external approaches recommendations
HOW INVESTORS SELECT FUNDS:
The average investor receives
180
fund proposals each year INVESTORS PLANS FOR THEIR NEXT
FUND COMMITMENT:
2018+
MOST IMPORTANT FAC TORS INVESTORS
6%
CONSIDER WHEN LOOKING FOR A PRIVATE
H2 2017
58%
of investors feel they get
EQUIT Y FUND MANAGER:
11%
insufficient information on track TEAM TRACK RECORD
record.
TEAM STRATEGY H1 2017
50% EXPERIENCE

insufficient information on the
FIRM TRACK
RECORD
83%
strategy of a fund.
The average investor makes

KEY REASONS INVESTORS
REJECT A GP:
Below-average team track record
Fees/terms
Length of team track record
8%
of proposals, on average, are sent
3
commitments to private equity
through for a second round of screening. funds each year.
19
2017
PREQIN GLOBAL
ALTERNATIVES
REPORTS
2017
PREQIN GLOBAL
REAL ESTATE
REPORT
Data, intelligence and
insights on fundraising,
2017
investor appetite, PREQIN GLOBAL
HEDGE FUND 2017

performance, deals REPORT PREQIN GLOBAL
INFRASTRUCTURE
and fund terms across ISBN: 978-1-907012-99-0
$175 / 125 / 150
REPORT
the following asset

www.preqin.com
classes:
2017
PREQIN GLOBAL
PRIVATE EQUITY & PRIVATE EQUITY &
VENTURE CAPITAL
VENTURE CAPITAL
ISBN: 978-1-907012-98-3
$175 / 125 / 150
REPORT
www.preqin.com
ISBN: 978-1-912116-00-3
HEDGE FUNDS
$175 / 125 / 150
www.preqin.com
REAL ESTATE
INFRASTRUCTURE
ISBN: 978-1-907012-97-6
$175 / 125 / 150
www.preqin.com
$175/125/150
For more information or to purchase your copies, please visit:
www.preqin.com/reports
Also in this series: The 2017 Preqin Global Private Debt Report and the 2017 Preqin Global Natural
Resources Report are due for release in March 2017.
SECTION THREE:
HEDGE FUNDS
RETURNS IMPROVE IN 2016,

BUT KEY CONCERNS REMAIN
2016 presented many challenges for that performance was a key issue moving in Q4. Looking forward to 2017, nearly
hedge fund managers; as well as several into the second half of the year; six months twice the proportion of investors plan to
high-profile investors announcing cuts later, 73% of respondents reported the reduce their exposure over the year than
from their hedge fund portfolios, investors same. The Preqin All-Strategies Hedge increase it, a concern for managers as both
more widely withdrew a net $102bn from Fund benchmark returned 7.40% in 2016, retaining capital and fundraising are likely
the asset class. This not only created a the highest level since 2013; however, to remain difficult tasks over 2017.
challenging fundraising environment but two-thirds of investor respondents
also increased the difficulty fund managers reported that hedge funds failed to meet As a result, there are many challenges
faced in retaining capital. Amid these expectations in 2016. ahead for fund managers, but with these
challenging conditions in an evolving challenges come opportunities. Finding
industry, Preqin conducted interviews with Hedge fund fees were an ever-present investors that are seeking to put fresh
over 150 institutional investors active in topic in the financial press during 2016. capital into the asset class looks set to be
hedge funds to provide an overview of Some high-profile investors made more difficult in 2017. However, those
how investors portfolios have performed significant withdrawals: New Jersey State fund managers that can respond to
over the course of 2016, their current Investment Council halved its target investor demands for greater alignment
views on the hedge fund industry and allocation to hedge funds in an effort of interests, harness some of the volatility
their plans for the year ahead. to reduce the fees paid to investment resulting from uncertain markets and
managers. Furthermore, $10.9bn deliver better returns will be best placed
These interviews highlighted that when Connecticut-based fund manager Tudor to win investor mandates. In these
it comes to the hedge fund universe, two Investment Corporation reduced fees of challenging times, data and intelligence
issues are at the forefront of investors one of its largest funds. to help fund managers really understand
minds: performance and fees. In recent their investors are more important than
years, investors have increasingly voiced The fundraising challenges of the past ever. The results of our investor interviews
concerns about the performance of the year show little sign of abating in 2017. and data taken from Preqins Hedge Fund
asset class. In Preqins June 2016 interviews Outflows accelerated over 2016, with the Online highlight some ways for managers
with investors, 49% of respondents felt largest levels of investor redemptions seen to succeed in 2017.
PERFORMANCE FEES OUTLOOK FOR 2017
2 in 3 84% 76% & 57%

investors surveyed reported that their of investors reported that they had not of investors respectively want to
hedge fund portfolios had not lived up invested in a hedge fund due to the see improvements in the level of
to expectations in 2016. proposed fund terms and conditions. management fees and how performance
fees are charged in 2017.
73%
64%
47% Performance Fees 20%

of investors surveyed issued a hedge Performance and fees are seen by of investors are intending to increase
fund redemption request in 2016, with investors as the key issues facing the their exposure to hedge funds in 2017.
underperformance the leading reason. hedge fund industry in 2017.

3. HEDGE FUNDS
SATISFACTION WITH
HEDGE FUNDS
T here are widespread levels of
dissatisfaction with returns: two out of
every three of the investors Preqin spoke
emerging markets investments meet their
expectations, which is unsurprising given
the Preqin Emerging Markets Hedge Fund
and discretionary CTA holdings
respectively did not meet expectations,
with the Preqin All-Strategies CTA
to revealed that hedge funds had not lived benchmark returned 9.96% in 2016 the benchmark returning seven percentage
up to their performance expectations second best performing top-level region points below that of the Preqin All-
in 2016 (Fig. 3.1) this is twice the level behind only North America (+10.20%). Strategies Hedge Fund benchmark in 2016.
reported in December 2015. This represents a sharp reversal from 2015,
when 91% of investors reported that their While some institutions have seen their
However, the term hedge fund emerging markets investments fell short hedge fund investments perform as
encompasses a broad array of fund types of expectations. The majority (69%) of expected in 2016, almost half (47%) of
and strategies, with managers using a investors also saw credit strategies the investors reported that their level of
myriad of instruments and trading styles second best performing top-level strategy confidence in hedge funds ability to
to generate returns for their investors. of 2016 meet their expectations over the achieve portfolio objectives had fallen
Therefore, the negative sentiment towards course of the year. (Fig. 3.3). Despite these concerns, more
hedge funds as a whole is not seen across respondents believe that the asset class
all hedge fund strategies (Fig. 3.2). Three- In contrast, 58% and 73% of surveyed will perform better in 2017 (28%) than
quarters of investors surveyed saw their investors in CTAs reported that systematic worse (19%, Fig. 3.4).
Fig. 3.1: Investor Views on Hedge Fund Portfolio Performance Fig. 3.2: Investor Views on Hedge Fund Portfolio Performance in
over the Past 12 Months Relative to Expectations, 2008 - 2016 2016 Relative to Expectations by Strategy
100% 3% 3% 100%
8%
9% 11% 11% 9% 90%

90% 19% 21% 29% 27%
80% 40%
50% 47% 43% 42% Met
70% 60%
80% 31% 69% 60%
60% 75% Expectations
Exceeded 50%
70% 57% Expectations 40%
53% 49% 57% 58% 71% 73% Fallen Short of
60% 30% 60%
62% 50% 53% 58% 58% Expectations
20% 40%
53% Met 31% 40%
50%
63% Expectations 10% 25%
0%
40%
Credit Strategies
Systematic CTAs
Event Driven Strategies
Activist
Fund of Hedge Funds
Emerging Markets
Macro Strategies
Relative Value Strategies
Equity Strategies
Discretionary CTAs
Multi-Strategy
66% Fallen Short of

30%
Expectations
20% 38% 40% 41% 35% 33%
27% 28%
10% 16%
0%
2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: Preqin Investor Interviews, December 2008 - December 2016 Source: Preqin Investor Interviews, December 2016
Fig. 3.3: Investors Change in Confidence in the Ability of Hedge Fig. 3.4: Investors Performance Expectations for Hedge Funds in
Funds to Achieve Portfolio Objectives over the Past 12 Months 2017 Compared with 2016
10%
19%
Increased Confidence 28%
Will Perform Better
No Change in
47% Will Perform About
Confidence
the Same
Reduced Confidence
43% Will Perform Worse
53%
23
KEY ISSUES AND REDEMPTIONS

A s seen in Fig. 3.5, there were several 2017, there are set to be more major INVESTORS THAT HAVE ISSUED A
challenging macroeconomic factors political events, notably elections in France HEDGE FUND REDEMPTION REQUEST
IN 2016
that affected investors hedge fund and Germany.
portfolios over the course of 2016; stock
market volatility (54%), low interest rates Performance and fees look set to be the
(52%) and central bank intervention (50%) leading factors that hedge fund managers
were cited by the greatest proportions of need to address in 2017 73% and 64%
Not Issued Issued
respondents as the factors that had the respectively cited these as the key issues Redemption Redemption
biggest impact. Investors believe these affecting hedge funds (Fig. 3.6). The Request Request
factors will remain the most influential in perception of the industry by the public is 53% 47%
2017; however, significantly more investors also a key concern for investors. In 2016,
feel it will have an impact on their various labour unions and trustees put
portfolios in 2017 than felt it did in 2016. pressure on CIOs to reduce the level of
fees paid to underperforming investment
managers and to re-evaluate their
Performance and exposure to hedge funds. More widely redeem holdings or exit the asset class
fees look set to be than this, much of the financial media has entirely, often citing performance and
the leading factors that focused on the difficulties faced by hedge fees as a factor in this decision. Nearly
hedge fund managers funds and their underperformance relative half (47%) of investors Preqin interviewed
to traditional benchmarks. This in turn has issued redemption requests in 2016,
need to address in 2017
led to a somewhat negative view from highlighting the difficulties fund managers
the general public on the nature of the faced in retaining assets throughout the
The geopolitical landscape is predicted to hedge fund investments that they may be year.
have a greater impact on investors hedge exposed to through investments made by
fund portfolios in 2017 than in 2016. their pension funds. Underperformance was the leading
2016 saw the Brexit decision by the UK driver behind investors decisions to
in June and Donald Trump winning the REDEMPTIONS issue redemptions in 2016; the largest
US election in November. With President Over the course of 2016, New York City proportions cited the failure of funds
Trumps inauguration in January 2017, the Employees Retirement System, AIG, to match benchmark returns (35%) and
consequences of the change in President New Jersey State Investment Council individual targets (27%) as the reasons
and his economic policy were far from and Kentucky Retirement System all behind their redemption requests (Fig.
clear in our December 2016 surveys. In announced their intentions to either 3.7). While one-quarter of respondents
Fig. 3.5: Investor Views on the Macroeconomic Factors that Had the Biggest Impact on Their Hedge Fund Portfolios in 2016 vs.
Predictions for 2017
80%
70% 68%
60%
54% 52% 50% 48%
50% 45% 2016
39%
40%
32% 34%
2017
30% 25% 23% 25% 25%
20% 18%
14% 13%
10%
0%
StockMarket Low Interest Central Bank Currency Commodity Geopolitical UK's EU Slowdown in
Volatility Rates Intervention Market PriceVolatility Landscape Referendum China's
Volatility Economy
Source: Preqin Investor Interviews, December 2016

3. HEDGE FUNDS
redeemed certain hedge fund holdings Fig. 3.6: Investor Views on the Key Issues Facing Hedge Funds in 2017
to allocate to other hedge funds in an
Performance 73%
attempt to rebalance their hedge fund
portfolio, some respondents planned to Fees 64%
allocate the redeemed capital elsewhere in
Perception of Industry by Public 49%
their portfolio. Fifteen percent of investors
said when they issued redemption Volatility/Uncertainty in Global Markets 42%
requests that they would allocate the Regulation 29%
returned capital to other areas of their
portfolio; a further 8% reported it was Governance 19%
specifically to direct this redeemed capital Transparency 18%
to other alternative assets such as private
Portfolio Management 18%
equity.
Notable Investors Exiting the Asset Class 10%
Underperformance 0% 10% 20% 30% 40% 50% 60% 70% 80%

was the leading Proportion of Respondents
driver behind investors Source: Preqin Investor Interviews, December 2016
decisions to issue
redemptions in 2016 Fig. 3.7: Reasons Why Investors Have Issued Redemption Requests in 2016
40%
35%
35%
With performance disappointing two- 30% 27%
thirds of investors in 2016, as well as being 25%
25%
a driving factor behind redemptions, 20%
15% 15%
Preqin turned its attention to the length 15%
10%
of time investors would tolerate the 10% 8%
underperformance of a fund before 5%
issuing redemptions. The majority of 0%
Hedge Fund Portfolio to
Hedge Fund Portfolio
Hedge Fund Portfolio to

Change of Strategy
Fund Underperformance
Fund Underperformance
within Hedge Fund
Fund Portfolio in $ Terms
Reducing Number of
respondents reported that they would
Relationships within
Reducing Size of Hedge
Relative to Benchmark
Alternatives Portfolio
Other Areas of Wider
Moving Capital from
Moving Capital from

Relative to Individual
only tolerate 18 months or fewer of fund
Other Areas of
Portfolio
Fund Target
underperformance before considering Portfolio

issuing a redemption request (54%, Fig.
3.8). As of December 2016, the cumulative
return over the past 18 months of
the Preqin All-Strategies Hedge Fund
benchmark was 4.92%, lower than the Source: Preqin Investor Interviews, December 2016
2016 annual return (+7.40%), highlighting
the industry underperformance in 2015
which may have been a driver behind Fig. 3.8: Investor Views on How Long They Will Tolerate Hedge Fund Underperformance
the requests in 2016. However, the before Redemption
largest proportion (28%) of investors 30% 28%
reported they would stay invested in an
25%
underperforming fund for more than 18

months before redemption, and a further 20%
16% said they would consider each fund 16% 16%
15%
on a case-by-case basis. 15% 13%
12%
10%
5%
2%
0%
0%
Less than 3
More than 18
On a Case-by-
6 Months
3-5 Months
12 Months
7-11 Months
13-18 Months
Months
Case Basis
Months
25
FEES AND ALIGNMENT OF

INTERESTS
A s seen in Fig. 3.9, over two-thirds Fig. 3.9: Extent to Which Investors Believe Fund Manager and Investor Interests Are
(69%) of investors interviewed Properly Aligned, 2015 vs. 2016
at the end of 2016 believe that their 100%
interests are not aligned with their fund 90%
managers, a reversal of sentiment from 31%
80%
Preqins December 2015 interviews.
Proportion of Respondents Agree that
With two-thirds of investors surveyed 70%
69% Interests Are
reporting that their hedge fund portfolios 60% Aligned
had fallen short of expectations in 2016
(see page 23), investors are seeking 50%
Disagree that
greater alignment of interests between 40% Interests Are
themselves and their managers, not only 69% Aligned
30%
to better encourage managers to take
on appropriate levels of risk to generate 20%
31%
returns, but also to ensure that investors 10%
extract good value from their hedge fund
0%
investments. 2015 2016
CHANGES IN 2016
Despite the vast majority of investors
Fig. 3.10: Investor Views on Changes in Prevailing Fund Terms over 2016
agreeing that their interests have become
less aligned with those of their fund
managers, 58% have seen favourable Seen Significant Change in Favour
4% 2% 7%
changes in fund terms over the course of of Investor
2016 (Fig. 3.10). This highlights the efforts
fund managers are going to in an attempt Seen Slight Change in Favour of
Investor
to improve the alignment of interests
with investors. However, continued Seen No Changes
36%
efforts are needed in 2017 in order to win
the approval of those investors that still
believe fees are too high. Seen Slight Change in Favour of
51% Fund Manager
MANAGEMENT FEES
Seen Significant Change in Favour
Fig. 3.11 provides insight into the specific
of Fund Manager
areas of fund terms and conditions that
investors feel have improved throughout
2016 and which areas investors still want Source: Preqin Investor Interviews, December 2016
to see improvement in over the coming
12 months. Management fees are at the a reduction in the level of performance TRANSPARENCY AND FUND MANAGER
forefront of investors minds; despite the fees charged, a greater proportion are COMMITMENTS
majority (55%) of respondents witnessing looking for changes in how performance Although 39% of respondents have
an improvement in management fees in fees are charged the first time Preqin seen an improvement in the level of
2016, over three-quarters (76%) see room has noted this. When performance is not transparency offered by fund managers,
for further reductions in management fees meeting expectations, investors look to there is still more work to be done by
over 2017. This is thirty percentage points managers to implement more favourable hedge funds to meet the demands of
higher than the proportion of investors terms such as hurdle rates, to better align an increasingly sophisticated audience
that sought improved management fees in interests and incentivize managers, or of investors. Fifty-seven percent of
2016 from our December 2015 survey. methods such as clawbacks, to return investors want managers to improve
fees to investors following reversals in the level of transparency they offer in
PERFORMANCE FEES performance. 2017. Although adding the necessary
Although nearly half (48%) of all investors staff and infrastructure to provide the
interviewed in December 2016 are seeking transparency that investors demand can

3. HEDGE FUNDS
be burdensome, those that are willing to Fig. 3.11: Investor Views on the Areas of Fund Terms and Conditions that Have
incur the costs to meet these transparency Changed over the Past 12 Months and that Need to Improve Further in 2017
demands either internally or through 80% 76%
outsourcing may be rewarded with both 70%
57% 57% 59%
inflows from institutions as well as capital 60% 55%
Proportion of
Respondents
48%
50%
that is invested for longer. 39% 39%
40% 30% 30%
30%
The majority (52%) of fund managers 18% 18% 15% 15%
20%
surveyed by Preqin believe that making a 10%
commitment to their own fund is the most 0%
Lock-up Period
Hurdle Rate
More Transparency
Manager Commitment
Management Fees
Fees Amount
How They Are Charged

effective way of showing alignment of
Performance
Performance Fees
at Fund Level
interests with investors; however, just 18%
to a Fund
of investors reported that they had seen
an improvement in managers having skin
in the game over the course of 2016. With
39% of investors seeking improvement
on this front, fund managers may need
Have Seen Change Need to Improve Further
to re-evaluate how much of their own
capital they have tied up in their fund
and whether this is appropriate to both
encourage better performance without
taking excessive or indeed too little
risk.
THE ROLE OF FEES IN THE DECISION-

MAKING PROCESS
When investors begin their screening
process when evaluating fund
opportunities, the strategy and
performance are the two leading
characteristics that institutions consider.
A large proportion (41%) of investors,
however, reported that they also look
for attractive fund terms charged by a 41%
of investors look for attractive fund terms
1 in 4
investors reported that marketing
manager as part of this process.
when evaluating a new hedge fund materials do not provide enough
opportunity. information on terms and conditions.
The importance of fees in the fundraising
process is again emphasized in Fig.
3.12. The vast majority (84%) of investor
respondents have frequently or Fig. 3.12: Frequency with Which Investors Have Decided Not to Invest in a Hedge Fund
occasionally decided not to invest in a Due to the Proposed Terms and Conditions
fund due to the proposed terms and
conditions. In addition, nearly one in four
investors reported that there is insufficient
16%
information on fees contained in fund
Frequently Decided Not to
manager marketing materials. Therefore, Invest
33%
not only is it important to evaluate fund
terms and set appropriate levels of fees, it
is also vital that fund managers effectively Occasionally Decided Not to
communicate to investors about the Invest
fees they will incur should they invest in
the fund. Failure to do this may lead to
institutional investors rejecting a fund Never Decided Not to Invest
51%
which may otherwise meet their needs.
27

I n Preqins December 2015 investor Fig. 3.13: Investors Intentions for Their Hedge Fund Allocations in the Next 12 Months
interviews, Preqin noted that for the Compared to the Previous 12 Months, 2009 - 2016
first time since we began tracking this 100%
data in 2009, more investors planned to 90% 20%
29% 26% 25%
decrease their allocations to hedge funds 35% 33% 32%
80% 38%
than planned to increase their exposure
to the asset class in the coming year 70% Increase Allocation
(Fig. 3.13). At the time, we predicted this 60% 43%
could be the first sign of outflows from 44%
50% Maintain Allocation
the asset class; this prediction proved 51% 47% 58%
correct over the course of the year as 40% 60%
54% 53%
investors withdrew a net $102bn from 30% Decrease Allocation
the industry. One year on, and Preqins
December 2016 interviews reveal that not 20% 38%
32%
only are a greater proportion of investors 10% 20% 20% 16%
planning on decreasing their allocation to 10% 9% 8%
0%
hedge funds in the next 12 months (38%, Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
compared to 32% in December 2015) but
the proportion of investors planning to
increase their allocation to the asset class
Fig. 3.14: Amount of Fresh Capital Investors Plan to Invest in Hedge Funds over the
in 2017 has decreased (20%, compared Next 12 Months, 2012 - 2016
to 25% in December 2015). With the
100% 4%
gap widening between the number of 11% 8% 6% 2%
13% 2%
investors decreasing their exposure and 90% 7% 11%
3% 3% 11%
those increasing their investment in hedge 80% 9% $500mn or More
Proportion of Fund Searches
funds, it looks like not only will 2017 24% 18%

24% 15%
70%
be another year in which outflows are
$250-499mn
likely, but one in which they could even 60% 12%
accelerate. 15% 11%
50% $100-249mn
As well as the expected decrease in 40%

74% $50-99mn
investor allocations in 2017, those 65%
30%
54%
investors that are looking for new hedge 47% 49% Less than $50mn
20%
funds are planning to put smaller sums of
capital to work than in any previous year. 10%
Data from Preqins Hedge Fund Online 0%
shows that since 2013, an increasing Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
proportion of mandates have been for Source: Preqin Hedge Fund Online
less than $50mn, while the proportion of
searches for a commitment of $500mn or a smaller number of investors looking at high level of investors in macro strategies
more has steadily declined: three in four making new allocations in the year ahead, plan to increase their exposure to these
mandates for 2017 are for $49mn or less those that are will be looking for more funds in 2017, a fifth plan to reduce their
(Fig. 3.14). However, a potentially positive funds than in 2016. exposure, highlighting the rather mixed
development is that there has been an outlook from institutional investors on
increase in the proportion of mandates STRATEGIES TARGETED macro strategies in 2017. Managed futures
for three or more funds compared to the Relative value strategies are attracting may have a more challenging year in
previous year (Fig. 3.15). Sixty-five percent investors attention in 2017: 26% of terms of fundraising in 2017 as compared
of investors searching for new hedge investors in these funds plan to increase to 2016, a year in which CTAs saw inflows
funds in 2017 will be looking to commit their exposure to these strategies over of $17bn. Twice the level of investors in
capital to three or more funds, compared the year, and just 6% plan to reduce the CTAs plan to reduce their exposure to the
to 58% of investors that issued searches amount of capital they have invested in strategy over 2017 than plan to increase
for 2016. Therefore, although there will be these funds (Fig. 3.16). Although a similarly their exposure. This represents a reversal

3. HEDGE FUNDS
of the trend we saw in our December 2015 Fig. 3.15: Number of Hedge Funds Institutional Investors Expect to Add to Their
investor interviews, and may indicate Portfolios over the Next 12 Months, 2012 - 2016
that these funds will see outflows in 100% 4% 2% 2% 1% 1%
4% 4%
2017, particularly as both systematic and 9% 8%
90% 10% 13%
discretionary CTAs have disappointed the 16%
majority of investors (see page 23). 80% 21% 20%

20% More than 20 Funds
70%
STRUCTURES TARGETED 41% 11-20 Funds
60%
Nearly half (41%) of investors in alternative 44%
UCITS funds plan to increase their 50% 34% 37% 39% 6-10 Funds
exposure to UCITS vehicles in the coming 40%
year (Fig. 3.17). One-third of respondents 3-5 Funds
30%
are planning to increase their exposure
1-2 Funds
to separately managed accounts in 2017, 20% 42%
32% 31% 32% 35%
while none indicated plans to decrease 10%
their exposure to this structure. Just under
0%
one-quarter of respondents reported plans
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
to increase their exposure to traditional
Source: Preqin Hedge Fund Online
commingled funds in 2017; however, a
notable 13% are planning to decrease
their exposure to this structure over the Fig. 3.16: Investor Allocation Plans for 2017 by Strategy
coming year, perhaps as they move money
Relative Value Strategies 26% 69% 6%
towards alternative structures such as
UCITS or managed accounts in order to Macro Strategies 25% 55% 20%
lower fees or increase the transparency of Event Driven Strategies 24% 61% 15%
their hedge fund holdings. Equity Strategies 24% 56% 19%
Credit Strategies 15% 74% 12%
2017 will not only Managed Futures/CTA 13% 61% 26%
be another year in Fund of Hedge Funds 13% 58% 29%
which outflows are likely, Multi-Strategy 7% 81% 12%
but one in which they Emerging Markets 7% 73% 20%
could even accelerate Activist 80% 20%
0% 10% 20%
30% 40% 50% 60% 70% 80% 90% 100%
OUTLOOK
Increase Exposure Maintain Exposure Decrease Exposure
As we move into 2017, it will be the
twin issues of fees and performance Source: Preqin Investor Interviews, December 2016
that the industry must address in order

to win back the favour of institutional Fig. 3.17: Investor Allocation Plans for 2017 by Structure
investors. However, 2016 represents the
best performing year for the Preqin All-
UCITS 41% 55% 5%
Strategies Hedge Fund benchmark since
2013, and the outlook of the majority
(53%) of investors is that this will be Separately Managed Accounts 33% 67%
matched in 2017, while over a quarter
(28%) believe the industry will perform Alternative Mutual Funds 25% 58% 17%
better in the coming year. With investors
recognizing that equity market volatility
Commingled Funds 24% 63% 13%
could have a bigger effect on their hedge
fund portfolios in 2017 than in 2016,
and with continued political and market Managed Accounts - Platforms 13% 88%
uncertainty expected over the year, the
value of hedge funds to reduce risk and 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
minimize losses may indeed be proved to Proportion of Respondents
these sceptical investors. Increase Exposure Maintain Exposure Decrease Exposure
29

SELECT HEDGE FUNDS
42%
of investors found it more difficult to source
63%
attractive investment opportunities in 2016 fail to meet their needs.
compared to 2015.
16%
Through internal
31%
Mainly internal
35%
Mix of internal
16%
Mainly approaches from
2%
investment team or consultant and external managers or marketers, approaches
234
fund proposals each year ACTIVE INVESTORS PLANS FOR THEIR
NEXT FUND COMMITMENT:
2018+
17%
CONSIDER WHEN LOOKING FOR A
H2 2017
53%
HEDGE FUND MANAGER:
10%
insufficient information on TEAM TRACK RECORD
track record.
60% EXPERIENCE

FIRM TRACK
RECORD
74%
strategy of a fund.

REJECT A FUND MANAGER:
Fees/terms
8%
2
commitments to hedge funds
through for a second round of screening. each year.

SECTION FOUR:
REAL ESTATE
INVESTOR APPETITE REMAINS

STRONG
I nstitutional investors have continued to
see strong returns from their real estate
portfolios, and remain committed to the
Investors have capital to put to work,
but there are concerns among some
institutions about the prospects for
suggests we can expect 2017 fundraising
to be on a par with the previous year, but
significant growth seems unlikely.
asset class as a result. In the three years real estate, and whether there are
to June 2016, private real estate funds opportunities to invest today. Asset pricing There remains substantial potential for the
generated an annualized 14.9%, one of is clearly a concern for many, with 68% of private real estate asset class to continue
the highest returns of any private capital investors naming it as a key issue affecting to grow, with 525 private real estate funds
asset class. Given this strong performance, the market, and 53% stating it is harder in market, targeting $177bn in capital
the vast majority of investors feel that to find attractive opportunities today commitments. A sizeable 48% of investors
real estate is meeting their objectives: than it was 12 months ago just 6% feel are below their target allocation to real
93% stated that real estate met or it is easier. As a result, some investors are estate, while only 22% are over-allocated.
exceeded their expectations in 2016, while reducing their outlay to real estate in the Furthermore, with over a third (36%)
over a three-year period 42% felt their shorter term, with 24% stating they would of investors expecting to increase their
expectations had been exceeded, more invest less capital in 2017 than 2016. A allocation in the longer term, investors will
than any other alternative asset class. similar proportion (25%) stated they would continue to look to real estate as a key part
invest more in 2017, with the remainder of their portfolio for diversification, reliable
investing at the same level as 2016. This income generation and attractive returns.
INVESTOR APPETITE MAKE-UP OF INVESTORS EVOLUTION OF INVESTORS
8.9%
93% 80% 8.9%

of investors surveyed feel their real of investors have less than $10bn in Investors average current allocation to
estate investments met or exceeded AUM. real estate, below the average target
their expectations in 2016. allocation of 10.0%.
53% $347bn 48%

of investors believe it is more difficult to Total amount allocated to the asset class of investors are below their target
find attractive investment opportunities by the 10 largest real estate investors. allocation to real estate a five-year low.
than 12 months ago.
68% 75% 63%

of respondents feel that valuations were of investors prefer to access the market of investors will not invest in first-time
the key issue affecting private real estate via private real estate funds. funds.
in 2016.

4. REAL ESTATE
SATISFACTION WITH
REAL ESTATE
I n December 2016, Preqin interviewed Fig. 4.1: Investor Views on Real Estate Portfolio Performance over the Past 12 Months
over 150 institutional investors to Relative to Expectations, 2014 - 2016
determine their appetite for and attitudes 100%
towards the real estate asset class, as well 90%
as their concerns and investment plans for 26%
33%
80% 39%
2017. Half of the investors surveyed have a
positive perception of the asset class, with 70% Exceeded Expectations
only 7% viewing it negatively. 60%
Met Expectations
50%
Over the past
67% Fallen Short of Expectations
three years, real 40%
60% 51%
estate performance 30%
has exceeded the 20%

expectations of over 10%
two-fifths of surveyed 0%
7% 10% 7%
investors the largest Dec-14 Dec-15 Dec-16
proportion among all Source: Preqin Investor Interviews, December 2014 - December 2016
alternatives
of over two-fifths (42%) of surveyed INVESTORS GENERAL PERCEPTION OF
Encouragingly, almost all (93%) investors investors, the largest proportion of any THE REAL ESTATE INDUSTRY
we interviewed at the end of 2016 felt that alternative asset class (Fig. 4.2).
their real estate investments had met or
exceeded their expectations over the past Investors remain confident in the ability
Positive
12 months (Fig. 4.1). However, given real of real estate to fulfil portfolio objectives,
estate returns falling to 8.6% in the year to with over three-quarters (77%) of investors Neutral
June 2016, down from 15.0% in the year to interviewed reporting there has been no Negative
June 2015, it is unsurprising that only 26% change in their level of confidence in the
of those surveyed felt the asset class had asset class (Fig. 4.3). However, compared to
exceeded expectations, compared with those interviewed at the end of 2015, the
39% the previous year. By contrast, the proportion of investors surveyed that have Dec-15 Dec-16
performance of real estate over the past increased confidence in the asset class has
three years has exceeded the expectations fallen by six percentage points.
Fig. 4.3: Investors Change in Confidence in the Ability of Real

Fig. 4.2: Investor Views on Real Estate Portfolio Performance Estate to Achieve Portfolio Objectives over the Past 12 Months,
over the Past Three Years Relative to Expectations 2015 vs. 2016
100%
10%
90% 16%
12%
80%
Exceeded Expectations 70%

Increased Confidence
60%
42%
Met Expectations 50% 77% No Change in
71%
Confidence
40%
Fallen Short of Reduced Confidence
Expectations 30%
46%
20%
10%
13% 13%
0%
Dec-15 Dec-16
Source: Preqin Investor Interviews, December 2016 Source: Preqin Investor Interviews, December 2015 - December 2016
33
EVOLUTION OF THE INVESTOR

UNIVERSE
I nstitutional investors continue to
recognize real estate as an important
part of their investment portfolios; 63% of
Fig. 4.4: Institutional Investors in Real Estate by Type
Private Sector Pension Fund

investors tracked by Preqin maintain an
10%
allocation to the asset class. Preqins Real 19% Family Office/Wealth Manager
3%
Estate Online features in-depth profiles
5% Public Pension Fund
for over 5,500 institutional investors
worldwide that are actively investing in Foundation
real estate, including their preferences, 8%
Endowment Plan
past investments, future investment plans 17%
and contact information for key decision Insurance Company
9%
makers. Asset Manager
Pension funds, private wealth firms and Bank/Investment Bank

14% 14%
foundations together account for nearly Other
two-thirds of the real estate investor
universe (Fig. 4.4). Pension funds are
Source: Preqin Real Estate Online
characterized by their large AUM (a
combined $16.5tn), and the larger pension
Fig. 4.5: Institutional Investors Preferred Route to Market by Location
funds are often able to source and manage
sizeable global real estate portfolios. 90%
84%
Private wealth has become a more 80%
important source of capital to the asset
70% 68%
class in recent years, with family offices 62%
64%
Proportion of Investors
and wealth managers accounting for a 60% 57% 57% Direct Investment
54%
combined 17% of all institutional investors. 48%
50%
Listed Funds
ROUTE TO MARKET 40% 34% 37%
While the exact composition of any 30% Unlisted Funds
24% 25%
investors portfolio is dependent on
20%
its unique needs, three-quarters of all
real estate investors globally utilize 10%
private real estate funds as a route to
0%
market, most likely due to the benefits North America Europe Asia Rest of World
fund managers can provide in terms of
Location
diversification and expertise in a range of Source: Preqin Real Estate Online
markets. Unlisted funds are typically the
investment of choice in North America, remaining an attractive alternative to
INSTITUTIONAL INVESTORS PREFERRED while 62% of Asia-based investors have traditional asset classes at a time when
ROUTE TO MARKET a preference for direct investment (Fig. institutional investors are looking for ever
4.5). In some European markets, such greater diversification in their portfolios.
as Switzerland, direct investment in real Real estate has continued to offer
estate has historically been favoured over competitive risk-adjusted returns, with low
indirect fund commitments. The $232bn correlation to equity and bond returns.
insurance company Swiss Re, for example,
has invested over $3bn in direct property Public pension funds have the least
holdings, equating to 94% of its allocation disparity between their average current
to the asset class. and target allocations (Fig. 4.7). Of these
investors, 88% utilize private real estate
ALLOCATIONS funds as a route to market, favoured by
Investor allocations to real estate have long-term investors due to their long lock-
Unlisted Direct Listed
grown since 2012 (Fig. 4.6), with real estate up periods.

4. REAL ESTATE
Insurance companies are the furthest based family offices or wealth managers
behind their target allocations, suggesting Private wealth that invest in real estate.
there is still a sizeable amount of capital firms investing
that may enter the asset class in the in real estate are Single- and multi-family offices have
coming years as these institutions look to predominantly based in similar preferences in terms of route
move closer to their long-term strategic to market, favouring direct real estate
North America, although
targets. investment (79% and 63% of each group
their presence in Asia is respectively) and unlisted funds (50% and
The proportion of institutional investors growing 59%) over listed real estate (15% and 28%).
below their target allocation has gradually Wealth managers on the whole have a
decreased over the past five years (Fig. 4.8). wealth managers, single- and multi- more balanced portfolio in terms of route
However, with almost half the institutional family offices) provide a significant to market, with a stronger preference for
investors with a real estate allocation source of capital to the real estate market. listed real estate (40%) than family offices.
below their long-term weighting, there Unsurprisingly, North America is home to
remains a sizeable amount of capital that the majority (55%) of private wealth firms
is likely to continue to enter the asset class (Fig. 4.9). While there are still relatively
in the medium and longer term. few of these investors based in Asia, this
is an area that has been growing rapidly
PRIVATE WEALTH FIRMS in recent years as the family office model
Representing 17% of all real estate becomes more widely used. Preqins Real
investors, private wealth firms (comprising Estate Online profiles more than 100 Asia-
Fig. 4.6: Institutional Investors Current and Target Allocations to Fig. 4.7: Institutional Investors Current and Target Allocations to
Real Estate, 2012 - 2016 Real Estate by Type
12% 12%
10.4%
Average Allocation to Real Estate
10.3% 10.4%
9.8%
10% 9.7% 9.1%
9.7% 9.8% 10.0%
10% 9.5% 9.6% 8.3% 8.1% 8.1% 8.0%
Average Allocation to Real Estate
7.7%
(As a % of AUM)
8.7% 8.9% 8% Average Current

8.5% 6.8%
6.1% 5.7% Allocation
8% 7.6% 7.7% 6%
(As a % of AUM)
Average Current
Allocation Average Target
4%
6% Allocation
Average Target 2%
Allocation
4%
0%
Private Sector
Sovereign Wealth
Endowment
Company
Foundation
Superannuation
Insurance
Public Pension
Pension Fund
2%
Plan
Scheme
Fund
Fund
0%
2012 2013 2014 2015 2016
Source: Preqin Real Estate Online Source: Preqin Real Estate Online
Fig. 4.8: Proportion of Investors that Are At, Above or Below Fig. 4.9: Private Wealth Firms Investing in Real Estate by
Their Target Allocation to Real Estate, 2013 - 2017 Location
100%
90% 18% 18% 18% 19% 22%

7%
80%
Above Target 11%
70% 25% 27% 27% North America

28% Allocation
30%
60%
At Target Europe
50%
Allocation
40% 55% Asia
Below Target
30% 57% 27%
55% 55% 53% Allocation Rest of World
48%
20%
10%
0%
Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
35

N early two-fifths (37%) of respondents
believe their private real estate
investments will perform worse in the
Fig. 4.10: Investors Expected Capital Commitment to Real Estate Funds in the Next 12
Months Compared to the Previous 12 Months, 2015 vs. 2016
100%
next 12 months than in the last, while 18%
90%
only 9% believe they will perform better, 25%
and this appears to be influencing short- 80%
term appetite. A significant increase in 70%
fundraising looks unlikely in 2017, as More Capital
60%
only one-quarter of investors surveyed 52%
will look to commit more capital in 2017 50% 51% Same Amount of Capital
than in 2016; 24% will commit less capital, 40%
indicating the fundraising landscape Less Capital
in 2017 is set to remain competitive 30%
(Fig. 4.10). The majority (55%) of active 20%
institutions plan to commit less than 30%
10% 24%
$100mn in fresh capital in 2017. Some
investors, however, are looking to put 0%
significant amounts of capital to work: Dec-15 Dec-16
nearly a fifth (19%) will commit $300mn or
more to private real estate funds in 2017. those institutions that plan to be active in The majority of investors looking to make
the asset class in 2017: 55% of investors commitments in 2017 have a domestic
Over the longer term, the majority (54%) are looking to commit to this strategy, bias: institutions are more likely to invest
of respondents will be looking to maintain followed by opportunistic (50%) and value capital in the region in which they are
their allocation to the asset class. Further added (48%). This is a notable change based (Fig. 4.12). However, this bias is not
growth in capital flowing into real estate compared with the previous year, when as prominent as it was 12 months ago,
is expected: 36% of investors plan to the majority (55%) of investors had a suggesting investors are increasingly
increase their exposure to the asset class, preference for value added funds. While looking to diversify their portfolios. Asia-
while only 10% will be reducing their debt funds are still only targeted by a based investors in particular seem to be
allocations. relatively small proportion of investors, looking for highly diversified portfolios:
the growth in demand for real estate 52% are targeting their home market, 51%
STRATEGIES AND REGIONS TARGETED debt opportunities may reflect investors are targeting the North American market
Fig. 4.11 shows there has been growth in looking for sources of reliable income in a and 42% are focusing on Europe, while
investor demand for lower-risk strategies, low-return environment. nearly a third (32%) are looking at a more
with core funds the most favoured by global spread for their investments.
Fig. 4.11: Strategies Targeted in the Next 12 Months by Private Fig. 4.12: Regions Targeted in 2017 by Private Real Estate
Real Estate Investors, 2014 - 2016 Investors by Investor Location
60% 55% 56% 70%
51% 55%
50% 47% 50%
50% 48% 60% 57%

45%
51% 52%
40% North America-
Dec-14 50%
32% Based Investors
28% 40% 42%
30% 25% Dec-15 40%
21% 32% Europe-Based
20% 15% 17% 30% Investors
Dec-16
10% 23%
10% 21%
10% 5% 20% 17% 18%
14% Asia-Based
0% Investors
10% 6%
Opportunistic
Value Added
Debt
Core
Core-Plus
Distressed
0%
North Europe Asia Global
America
Strategy Targeted Region Targeted

4. REAL ESTATE
KEY ISSUES IN 2017

A s can be seen in Fig. 4.13, over half
(53%) of investors interviewed are
finding it more difficult to find attractive
Fig. 4.13: Investor Views on the Difficulty of Identifying Attractive Investment
Opportunities Compared to 12 Months Ago
investment opportunities compared with

12 months ago, with 68% of respondents 6%
reporting that asset valuations are the key
issue affecting real estate (Fig. 4.14). Harder to Find Attractive
Opportunities
No Change
Asset valuations
remain a key 41% 53%
Easier to Find Attractive
issue for investors, as Opportunities
does sourcing attractive
investment opportunities
in the current real estate
market
In terms of the key macroeconomic factors and fixed income continues to make real
affecting the asset class in 2017, over two- estate attractive to many investors despite
thirds (68%) of surveyed investors believe the competitive pricing. Central bank
low interest rates will have the greatest intervention (23%) and current market
impact on their real estate portfolio in volatility (17%) were also named as key
the coming year an issue that was seen factors for the next 12 months.
by 76% of respondents to have had the
biggest impact on real estate portfolios
over 2016 (Fig. 4.15). Continued low
interest rates make borrowing cheap,
and the spread between real estate yields
Fig. 4.15: Investor Views on the Macroeconomic Factors that

Fig. 4.14: Investor Views on the Key Issues Facing Real Estate in Had the Biggest Impact on Their Real Estate Portfolios in 2016
2017 vs. Predictions for 2017
Valuations 68% Low Interest Rates 76%
68%
Performance 37%
Central Bank Intervention 18%
Exit Environment 28% 23%
Deal Flow 25% 18%
Currency MarketVolatility
Fees 25% 17%
Availability/Pricing of Debt Financing 23% 17%
Volatility/Uncertainty in Global Markets 23% 13%
StockMarketVolatility
Regulation 16% 16%
Interest Rates 14% Brexit Vote 21%
14%
Portfolio Management 14% 7%
Slowdown in China's Economy
Governance 10% 9%
Transparency 5% 0% 20% 40% 60% 80%
0% 20% 40% 60% 80% Proportion of Respondents
Proportion of Respondents 2016 2017

37
APPETITE FOR FIRST-TIME

FUNDS AND ALTERNATIVE
STRUCTURES
T he years up to 2015 saw a steady Fig. 4.16: Investor Attitudes towards First-Time Private Real Estate Funds, 2009 - 2016
decline in the proportion of 100%
institutional investors willing to invest 17% 18% 15%
90% 21% 18%
in first-time funds; however, there has 26% Will Invest in First-
34% Time Funds
been a slight increase in the proportion 80% 41% 12%
4% 12% 13% 12%
of investors willing to invest in first-time
70% 9% 7%
15% 7% 7% 6%
funds in 2016 (18%) from 2015 (15%, Fig. Will Consider
60% 16%
4.16). Institutional investor appetite also Investing in First-
15% 11% Time Funds
varies significantly depending on AUM: the 50%
larger the investor, the more likely they are 40% 16%
Will Only Invest in
to invest in first-time funds. These larger 16%
66% 67% Spin-offs
30% 63% 62% 63%
institutions are more likely to have the staff
48%
and resources to conduct the additional 20%
34% Will Not Invest in
due diligence that may be required to 28%
10% First-Time Funds
invest with an emerging manager.
0%
Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
The ability of an investor to allocate capital
Source: Preqin Real Estate Online
through separate accounts, joint ventures
and co-investments is also closely linked sizeable internal teams (often in multiple
to its size, with larger institutions having Larger institutions locations), are very likely to be active
the resources and the experience needed are more likely through these routes. Other groups
to source, review and monitor these to invest in first-time such as family offices or asset managers,
investments. Around 60% of investors which are typically more experienced in
funds, separate accounts,
with assets of $10bn or more will invest, or making direct real estate investments, are
consider investing, through these routes
joint ventures and co- also more likely to make co-investments
to market, while less than one-quarter of investments or separate account commitments.
those that manage up to $1bn in AUM will Investors such as endowment plans and
consider these structures. co-investments and separate accounts foundations, which in many cases have
changes with investor type. Sovereign smaller AUM and smaller investment
Fig. 4.17 and Fig. 4.18 show how the wealth funds, which typically have large teams, are less likely to consider these
likelihood of allocating capital through amounts of capital to put to work and routes to real estate.
Fig. 4.17: Investor Appetite for Real Estate Co-Investments by Fig. 4.18: Investor Appetite for Real Estate Separate Accounts by
Type Type
100% 100%
90% 20% 15% 15% 14% 90% 14% 12%
31% 29% 28% 26% Make Separate
80% 38% 34% 10% 11% 10% Make 80% 41% 10% 8% Account
52% 11% Co-Investments

70% 60% 70% 9% Investments
11% 14%
60% 12% 60% 81% 16%
13% Considering 7% Considering
50% 50% Separate Account
Co-Investments
40% 19% 76% 40% 75% 80% Investments
69% 74% 74%
30% 20% 30% 60% 58% 65%
49% 54% Do Not Make 53% 53% Do Not Make
20% 20%
30% Co-Investments 6% Separate Account
10% 20% 10% Investments
13%
0% 0%
Private Sector
Family Office
Insurance
Wealth Fund
Asset Manager
Public Pension
Endowment
Foundation
Company
Pension Fund
Wealth Fund
Company
Private Sector
Endowment
Foundation
Asset Manager
Family Office
Insurance
Public Pension
Pension Fund
Sovereign
Sovereign
Plan
Plan
Fund
Fund

4. REAL ESTATE

SELECT REAL ESTATE FUNDS
53% 47%
22%
Through internal
29%
Mainly internal
35%
Mix of internal
13%
Mainly approaches
1%
207
FUND COMMITMENT:
2018+
11%
CONSIDER WHEN LOOKING FOR A PRIVATE
H2 2017
53%
REAL ESTATE FUND MANAGER:
8%
record.
55% EXPERIENCE

FIRM TRACK
RECORD
81%
strategy of a fund.

REJECT A GP:
Fees/terms
8%
2
commitments to private real
through for a second round of screening. estate funds each year.
39
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SECTION FIVE:
INFRASTRUCTURE
INVESTOR APPETITE REMAINS

STRONG DESPITE CONCERNS
I n December 2016, Preqin conducted
interviews with over 140 institutional
investors actively committing capital to
With a record $60bn in capital distributed
back to investors in 2015, nearly double
the previous record of $31bn in 2014, it is
pricing is a key issue for the industry in
2017, with high prices potentially eating
into the eventual returns investors will
the infrastructure asset class to gauge unsurprising that investors are looking to see from their infrastructure portfolios.
their thoughts on the market and their ramp up their infrastructure allocations Beyond this, investors have the challenge
appetite for investment opportunities in in 2017, with 88% expecting to commit of identifying the managers that can
the coming year. either the same amount or more capital to deliver the returns they seek at an
the asset class in 2017 compared to 2016. acceptable level of risk, within an intensely
Institutional investors continue to see competitive market.
strong risk-adjusted returns from their Despite positive sentiment and growing
infrastructure portfolios and remain appetite for the asset class, investors With the majority (63%) of investors under-
committed to the asset class. Eighty-nine have concerns that managers looking allocated to infrastructure in January
percent of respondents stated that the to successfully raise capital need to be 2017, the asset class is likely to see a
performance of infrastructure had either aware of and allay. With a competitive continuation of strong fundraising figures
met or exceeded their expectations in the deal environment pushing up prices for and upward pressure on asset prices,
past 12 months. infrastructure assets, over half (54%) of particularly if interest rates remain low.
investors we interviewed stated that asset
3.9%
89% 62% 3.9%

of investors felt their infrastructure of investors have less than $10bn in Investors average current allocation to
investments met or exceeded their AUM. infrastructure, below the average target
expectations in 2016. allocation of 5.2%.
54% $106bn 63%

of investors feel that asset pricing is a Total amount allocated to the asset class of investors are below their target
key issue for the infrastructure market by the 10 largest infrastructure investors. allocation to infrastructure.
in 2017.
41% $23.8bn 45%

of surveyed investors will increase Estimated current allocation to the of investors will not invest in first-time
their allocation to infrastructure co- asset class by Abu Dhabi Investment funds, the largest proportion in the
investments in 2017. Authority, the largest infrastructure period 2013-2016.
investor globally.

5. INFRASTRUCTURE
SATISFACTION WITH
INFRASTRUCTURE
W hile the largest proportion (44%)
of investors surveyed still have a
positive attitude towards the asset class,
expectations over the past 12 months,
an increase from 77% in December
2015. Indicative of the level of investor
in confidence (Fig. 5.3). Mirroring the
wavering positivity among investors in the
asset class, this may also reflect concerns
this is a smaller proportion compared satisfaction with the asset class, the over asset pricing and deal flow in an
with 56% in December 2015 (Fig. 5.1). proportion of respondents that felt their increasingly competitive market.
Concerns regarding asset pricing, deal infrastructure investments had fallen short
flow and the ability of fund managers to of expectations was substantially lower at Despite investors having somewhat less
put large amounts of dry powder to work 11% in 2016 (from 23% in 2015). confidence in infrastructure than a year
may be the influencing factors in this ago, they continue to have a positive
change in sentiment. Fifty-five percent of As of the end of 2016, a greater proportion outlook on the asset class. Fig. 5.4 shows
respondents felt that the current pricing of (68%) of investors had experienced that 53% of investors surveyed intend
infrastructure assets was expensive. no change in their confidence in to increase their allocation to the asset
infrastructure to achieve their portfolio class over the longer term. A further 37%
As shown in Fig. 5.2, 89% of institutional objectives over the past year than in of investors expect to maintain their
investors felt that their infrastructure fund December 2015 (64%). However, a smaller allocation to infrastructure.
investments had met or exceeded their proportion (17%) have seen an increase
Fig. 5.1: Investors General Perception of the Infrastructure Fig. 5.2: Investor Views on Infrastructure Portfolio Performance
Industry, 2015 vs. 2016 over the Past 12 Months Relative to Expectations, 2015 vs. 2016
100% 100%
12%
90% 90% 18%
80% 44% 80%

56% Exceeded
70% 70%
Expectations
Positive
60% 60%
50% 50% 59% Met
Neutral 77%
Expectations
40% 40%
39%
30% 29% Negative 30% Fallen Short of
Expectations
20% 20%
10% 17% 10% 23%
14% 11%
0% 0%
Dec-15 Dec-16 Dec-15 Dec-16
Fig. 5.3: Investors Change in Confidence in the Ability of

Infrastructure to Achieve Portfolio Objectives over the Past 12 Fig. 5.4: Investors Intentions for Their Infrastructure Allocations
Months, 2015 vs. 2016 over the Longer Term, 2015 vs. 2016
100% 100%
90% 17% 90%

23%
80% 80%
Increased Confidence 52% 53% Increase

70% 70%
Allocation
60% 60%
No Change in Maintain
50% 68% Confidence 50% Allocation
64%
40% 40%
Reduced Confidence Decrease
30% 30% 39% 37% Allocation
20% 20%
10% 10%
14% 15% 11%
9%
0% 0%
43

UNIVERSE
D espite its relative youth as a Fig. 5.5: Institutional Investors in Infrastructure by Type, 2013 vs. 2017
standalone asset class compared 25%
with other alternatives, infrastructure 21%
20%
has developed into a fully fledged 20%
independent asset class in recent years, 17% 17%
15% 15% Jan-13
with the size of the market and availability 15%
12%
of opportunities increasing as many 10% 10%
governments seek private funding for 10% 9% 9% 8% Jan-17
7% 8%
6% 6% 7%
public infrastructure projects.
5% 3%
The number of 0%
investors in the Public Pension
Other
Company
Bank/Investment
Private Sector
Asset Manager
Private Wealth
Foundation
Insurance
Endowment
Pension Fund
asset class has increased
Plan
Fund
Bank
by more than 116% since
2013
Source: Preqin Infrastructure Online
MAKE-UP OF INVESTORS a smaller proportion of the overall total in active investors in unlisted infrastructure:
Preqins Infrastructure Online service 2017 compared with 2013. 17% of investors have total AUM of $100bn
tracks over 2,900 institutional investors or more. This is a larger proportion than in
across the globe that are investing, or are Infrastructure continues to hold previous years, indicating the increasing
considering investing, in the asset class, substantial appeal for large institutional interest and activity in the asset class from
with extensive profiles of investment investors attempting to manage long- the largest sovereign wealth funds, public
plans, preferences and existing portfolios. term liabilities in a low-interest rate pension funds and insurance companies.
The number of institutional investors in environment, where yields remain at
the infrastructure asset class has increased historically low levels. However, it is also ALLOCATIONS TO INFRASTRUCTURE
by over 116% between 2013 and 2017, notable that private wealth investors make Average current and target allocations to
an indication of the increasing depth of up 12% of the investor universe in 2017, infrastructure have decreased slightly from
the investor universe. Fig. 5.5 shows that up from 3% in 2013. 2016 and stand at 3.9% and 5.2% of AUM
pension funds continue to account for in 2017 respectively, reversing the upward
around a third of infrastructure investors, Fig. 5.6 illustrates that large investors trend from 2013 to 2015 (Fig. 5.7). New
although public pension funds make up represent a substantial proportion of investors entering the industry in large
Fig. 5.6: Institutional Investors in Infrastructure by Assets under Fig. 5.7: Institutional Investors Current and Target Allocations to
Management Infrastructure, 2013 - 2017
40% 6% 5.7% 5.7%
36%
35% 5.2%
5.0% 5.1%
5%
Average Allocation to Infrastructure
30%
25% 4.3% 4.3%
4% 3.9%
20% 3.6% Average Current
(As a % of AUM)
16% 16% 17%

3.3% Allocation
15%
10% 3%
10%
5% Average Target
5% Allocation
2%
0%
Less than
$10-49.9bn
$50-99.9bn
or More
$500-999mn
$1-9.9bn
$100bn
$500mn
1%
0%
Assets under Management Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Source: Preqin Infrastructure Online Source: Preqin Infrastructure Online

5. INFRASTRUCTURE
numbers are likely to have contributed to Fig. 5.8: Institutional Investors Current and Target Allocations to Infrastructure by Type
this, with fresh entrants typically allocating 9%
smaller proportions of their total assets 7.7%
8%
Infrastructure (As a % of AUM)

initially. Furthermore, investor concerns 6.8% 6.9%
7%
Average Allocation to
regarding the pricing of infrastructure Average Current
6%
assets and the availability of assets for 5.0% 5.0% Allocation
5% 4.6% 4.4%
deals may also have contributed to the 4.3% 4.0%
4% 3.7% 3.4%
reduction in average allocations to the 3.2%
asset class in 2016. 3% Average Target
2% Allocation
1%
0%
Superannuation
Private Sector
Foundation
Endowment
Public Pension
Insurance
Company
Pension Fund
Plan
Scheme
Fund
63%
of investors are below their target Fig. 5.9: Proportion of Investors At, Above or Below Their Target Allocation to
allocation to the asset class. Infrastructure, 2013 - 2017
100%
11% 12% 10% 11%
90% 19%
Superannuation schemes, which
are typically based in the developed 80%
27% 26% 27% 26% Above Target
infrastructure market of Australia, continue
70% Allocation
to have the highest average current 28%
and target allocations at 6.8% and 7.7% 60%
respectively (Fig. 5.8), a reflection of their 50% At Target
experience and expertise in the asset class. Allocation
40%
Significant allocations are also maintained
30% 62% 62% 63% 63%
by endowment plans and foundations, as 53%
Below Target
well as other long-term investors including Allocation
20%
insurance companies and public and
10%
private sector pension funds.
0%
The majority (63%) of infrastructure Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
investors are below their target allocation Source: Preqin Infrastructure Online
to infrastructure, indicating the availability
of capital and the continued growth Fig. 5.10: Infrastructure Investors by Source of Allocation, 2013 - 2017
prospects in the asset class (Fig. 5.9).
100%
SOURCE OF ALLOCATION 90% 20% 21% 19% 20% 21%

Investors continue to allocate capital 80% Other
to infrastructure through a number of 13% 18%
15%
70% 20% 21%

sources, although it is notable that the
proportion of investors maintaining 60% Part of Real Assets
25% Allocation
a separate infrastructure allocation 50% 24% 24% 22%
decreased to 35% in January 2017, down 23%
40% Part of Private Equity
from 42% in January 2013 (Fig. 5.10). A Allocation
possible cause of this is the increase in the 30%
number of new infrastructure investors, 42% Separate Infrastructure
20% 40% 39% 38%
which are likely allocating to the asset 35% Allocation
class via a real assets (21% of all investors) 10%
or private equity (23%) allocation while 0%
building up expertise in the area. Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
45

INVESTORS COMMITMENTS IN 2017 Fig. 5.11: Investors Expected Capital Commitments to Infrastructure Funds in the Next
With 88% of investors intending to commit 12 Months Compared to the Previous 12 Months, 2015 vs. 2016
more capital or maintain the same level of 100%
commitments over 2017, infrastructure is
90%
clearly being recognized for its potential
to generate stable returns over the longer 80% 38%
Proportion of Respondents 48%
term. 70% More Capital
60%
The proportion of surveyed investors that
Same Amount of
expect to commit the same amount of 50%
Capital
capital in the next 12 months compared 40% 26% 50%
to the previous year has almost doubled Less Capital
30%
from 26% in December 2015 to 50%
in December 2016 (Fig. 5.11). This 20%
proportional increase coincides with a 10%
26%
decrease in the proportion of investors 12%
that expect to commit more capital as well 0%
Dec-15 Dec-16
as those that expect to commit less in the
next 12 months.
Fig. 5.12: Sectors* Investors View as Presenting the Best Opportunities
INVESTOR PREFERENCES
As shown in Fig. 5.12, renewable energy Renewable Energy 64%
is favoured by the largest proportion of
investors, with 64% believing that these Energy (excl. Renewables) 43%
assets present attractive opportunities.
Demand for renewable energy Transport 34%
infrastructure has been bolstered by
political support for alternative sources Utilities 21%
of energy that are sustainable for the
environment and cost-effective over the Telecommunications 21%
longer term. Private infrastructure capital
Social 17%
therefore has sought to capitalize on these
opportunities, with investors attracted to
Waste Management 9%
the stable, long-term risk-adjusted returns
available. 0% 10% 20% 30% 40% 50% 60% 70%
The largest Source: Preqin Investor Interviews, December 2016
proportion of largest proportion (46%) of respondents as presenting attractive opportunities,

investors believe that believe these strategies currently present the market that raised the largest number
the renewable energy attractive opportunities, followed by of funds in 2016. Reflecting the political
sector presents attractive opportunistic (42%) and value added and economic risk associated with
(35%) strategies (Fig. 5.13). investing in the less evolved markets
investment opportunities
in the developing world, the smallest
North America is the most favoured proportions of investors favour exposure
A large proportion (43%) of investors destination for infrastructure investment to the Middle East (12%) and Latin America
believe that energy infrastructure over the coming year, with 60% of (12%). However, as competition for
(excluding renewable assets) presents respondents believing it presents attractive assets in the established markets
compelling opportunities, followed compelling opportunities (Fig. 5.14); of North America and Europe pushes
by transport (34%), utilities and this coincides with the large number of valuations up further, investors may seek
telecommunications (each 21%). Despite North America-focused funds in market more affordable opportunities in markets
strong competition for core assets, the currently. Half of respondents cited Europe elsewhere.

5. INFRASTRUCTURE
Fig. 5.13: Strategies* Investors View as Presenting the Best Opportunities

The proportion of
investors targeting Core 46%
direct investments has

Opportunistic 42%
decreased somewhat in
recent years Value Added 35%
ROUTE TO MARKET Core-Plus 31%

Unlisted funds remain the preferred
route to market for the majority (73%) Debt 21%
of infrastructure investors over the next
12 months, although this proportion
Distressed 10%
remains significantly below the 91%
recorded in January 2013 (Fig. 5.15).
0% 10% 20% 30% 40% 50%
Increasing investor interest in the direct
investment model is largely responsible Source: Preqin Investor Interviews, December 2016
for this change, with this route to market
cementing itself as a major component Fig. 5.14: Regions* Investors View as Presenting the Best Opportunities
of many investors future investment
plans. However, the proportion of North America 60%
investors targeting direct investments has
decreased somewhat in recent years. The
Europe 50%
small reduction in average current and
target allocations, the influx of new and
Asia 26%
less experienced investors entering the
market in recent years and the increased
appetite for unlisted funds are probable Australasia 17%
causes of this, alongside the constraints
on the capabilities of investors to execute Middle East 12%
direct investment transactions internally.
Latin America 12%
0% 10% 20% 30% 40% 50% 60% 70%

Fig. 5.15: Routes to Market Targeted in the Next 12 Months by Infrastructure Investors,
2013 - 2017
100%
91%
90%
80% 76%
73%
70% Unlisted Funds

70% 65%
60% 56%
48% Direct Investment
50% 46%
40%
40%
29% Listed Funds
30%
20% 14%
7% 9%
10% 6% 6%
0%
Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
*Respondents were not prompted to give their opinion on each sector/strategy/region individually but to name those they felt best fit these categories; therefore, the results display the
sectors/strategies/regions at the forefront of investors minds at the time of the survey.
47
KEY ISSUES IN 2017

I ncreased participation from strategic
and institutional investors, as well as a
large number of funds on the road, has
Fig. 5.16: Investor Views on the Key Issues Facing Infrastructure in 2017
Valuations 54%
Deal Flow 37%
made the market more competitive. It is
Performance 33%
therefore unsurprising that pricing is the Regulation 30%
biggest concern among infrastructure Exit Environment 22%
investors (as cited by 54%, up substantially Fees 21%
from 38% in 2015) as low interest Availability/Pricing of Debt Financing 14%
rates have contributed to rising asset Volatility/Uncertainty in Global Markets 11%
valuations (Fig. 5.16). The availability of Portfolio Management 5%
attractive deals and the performance Interest Rates 5%
of infrastructure funds are also cited by Governance 5%
Commodity Pricing 3%
37% and 33% of investors respectively
Transparency 3%
as key concerns in the current market,
Notable Investors Exiting the Asset Class 2%
proportions that are relatively unchanged
from 38% and 32% at the end of 2015. 0% 10% 20% 30% 40% 50% 60%
One Europe-based institutional investor Proportion of Respondents
noted that the infrastructure market was Source: Preqin Investor Interviews, December 2016
growing, so although prices are currently

expensive, there is hidden value, if you Fig. 5.17: Investor Views on the Macroeconomic Factors that Had the Biggest Impact
can find the right people and the right on Their Infrastructure Portfolios in 2016 vs. Predictions for 2017
approach.
80%
70%
70% 64%
Pricing is the 60%

biggest concern 50% 2016
among infrastructure 40%
investors, as cited by 30%
30% 2017
54%, as low interest rates 20%
20%
18% 18%
14%
have contributed to rising 10%
11% 11% 11%
7% 9%
11%
9% 9%
5%
asset valuations 0%
Brexit Vote
PriceVolatility
Central Bank
Geopolitical
StockMarket
Low Interest
MarketVolatility
China's Economy
Intervention
Landscape
Commodity
Slowdown in
Volatility
Rates
Currency
In terms of macroeconomic factors, the

majority (64%) of surveyed investors
anticipate that low interest rates will have
the biggest impact on their portfolios in
the coming year. The global geopolitical Source: Preqin Investor Interviews, December 2016
landscape was cited by 30% of investors,
while only 7% expect the Brexit vote to
have a significant impact on their portfolio
in 2017 (Fig. 5.17).

5. INFRASTRUCTURE
APPETITE FOR ALTERNATIVE

STRUCTURES
A s the asset class evolves, many
investors are increasingly looking
at alternatives to the primary fund
Fig. 5.18: Investor Appetite for Co-Investments and Separate Accounts by Assets under
Management
90%
commitment model to gain exposure to
80% 78%
infrastructure. While a number of larger
investors have made direct investments 70% 66% 64%
Proportion of Investors Make or Considering
in assets, many others lack the expertise, 60%
59%
human resources or financial capability to 53% Co-Investments
do so. Structures such as co-investments 50%
43%
and separate accounts can offer investors 40%
the opportunity to gain more exposure to Make or Considering
30% 28% Separate Account
attractive assets, with more control and 21% Investments
the potential for lower fees, while also 20%
benefitting from a third-party managers 10%
skill and pipeline of potential deals.
0%
Less than $1bn $1-9.9bn $10-49.9bn $50bn or More
Alternative structures often require larger
capital commitments and substantial Assets under Management
human resources to effectively carry
out the due diligence and portfolio capital outlay required than for separate Although the majority of investors expect
management required; the greater the accounts. the proportion of co-investments in their
AUM of the investor, the more likely portfolio to remain unchanged, 33%
they are to make or consider making Fig. 5.19 reveals a contrast in investors expect this to increase over the next 12
co-investments or separate account allocation plans for 2017: the majority months (Fig. 5.20). In terms of separate
investments. Sixty-four percent of (64%) of surveyed investors expect to accounts, an even larger majority (73%)
investors with at least $50bn in AUM make maintain their existing allocation to do not anticipate any change, while
or consider making separate account infrastructure separate accounts, while 27% expect them to make up a greater
investments, compared with only 21% 28% plan to either slightly or significantly proportion. With few, if any, investors
of investors with less than $1bn in AUM increase their allocation in the coming expecting co-investments or separate
(Fig. 5.18). This trend is similar for co- year. A larger proportion (41%) of investors accounts to decrease in prominence
investments; however, two-thirds of the plan to increase their allocation to co- within their portfolios, both structures
smallest investors (those with less than investments in 2017 compared to separate appear to have the support of the investor
$1bn in AUM) will make co-investments, as accounts, while just 8% expect to decrease community in the next 12 months.
the model is less restrictive in terms of the their allocation.
Fig. 5.20: Investors Expected Change in the Proportion of

Fig. 5.19: Investor Allocation Plans for Separate Accounts and Separate Accounts and Co-Investments in Their Portfolio over
Co-Investments in 2017 the Next 12 Months
100% 100%
14% 9% 11%
90% 15%
90%
80% 80% 18%
14% Significantly Increase 22%
26% Significantly Increase

70% 70%
Slightly Increase Slightly Increase
60% 60%
50% Stay the Same 50% Stay the Same
40% 64% 40%
Slightly Decrease 73% 61% Slightly Decrease
52%
30% 30%
20% Significantly Decrease 20% Significantly Decrease
10% 10%
7% 4%
4% 0% 6%
0%
Separate Accounts Co-Investments Separate Accounts Co-Investments
49

SELECT INFRASTRUCTURE FUNDS
46% 48%
11%
Through internal
31%
Mainly internal
36%
Mix of internal
20%
Mainly approaches
2%
155
FUND COMMITMENT:
2018+
10%
CONSIDER WHEN LOOKING FOR AN
H2 2017
48%
INFRASTRUC TURE FUND MANAGER:
16%
record.
53% EXPERIENCE

FIRM TRACK
RECORD
74%
strategy of a fund.

REJECT A GP:
Fees/terms
10%
2
commitments to unlisted
through for a second round of screening. infrastructure funds each year.

SECTION SIX:
PRIVATE DEBT
INVESTORS LOOK TO INCREASE

EXPOSURE IN 2017
T he growth in AUM held by private
debt fund managers during the past
decade can be attributed in no small part
interviewed communicated that their
private debt investments had either met
or exceeded their expectations in 2016.
economies around the globe, particularly
the UK and US.
to the systematic retreat of banks from the Strong levels of investor satisfaction are North America and Europe remain
commercial lending space. Institutional certainly welcomed by fund managers home to the majority of active private
investors have continuously poured capital raising new funds in 2017, which will debt investors, with 83% of allocators
commitments into the asset class, which compete for commitments from the 57% headquartered in the two regions. It is
now holds $594bn in AUM, and includes of respondents that plan to commit more likely that 2017 will see modest upticks
strategies spanning the risk/return capital to the asset class in the coming in private debt activity outside these two
spectrum. Preqin currently tracks more year. At the time of Preqins December areas, as investors and fund managers
than 2,400 institutional investors that are 2016 investor interviews, just 8% of alike feel the effects of greater market
actively investing or planning their maiden existing investors planned to decrease saturation and competition. Quite a few
commitment to the asset class. their private debt allocations in the long investors perceive Africa, Asia and South
term, while nearly two-thirds intended to America as promising areas of opportunity
The positive outlook for the asset class is increase their allocations. Looking forward, for private lending funds in the near
largely a product of the hugely positive investors will be keeping a close eye on future.
investor sentiment: 93% of investors we interest rates and potential issues within
93% 15% 20.7%

of investors feel their private debt of private debt investors manage Average target allocation (as a
investments met or exceeded their private wealth. proportion of AUM) for family offices,
expectations in 2016. the highest of any investor type.
57% 30% 17%

of investors plan to commit more capital of investors in private debt are of investors in private debt are located in
to private debt funds in 2017. pension funds. Asia & Rest of World, up five percentage
points from one year earlier.
+
26% $5.4bn 11%
of investors typically commit to three or Current allocation to private debt of of investors invest in private debt from a
more private debt funds per year. KB Insurance, the largest Asia-based dedicated allocation.
institutional private debt investor.

6. PRIVATE DEBT
SATISFACTION WITH
PRIVATE DEBT
P reqin interviewed more than 80 Fig. 6.1: Investor Views on Private Debt Portfolio Performance over the Past 12 Months
institutional private debt investors Relative to Expectations
at the end of 2016 to ascertain how their
investments have performed in the past
year and where they see the industry 7%
heading in 2017. The results indicate
27%
that investor appetite for the coming Exceeded Expectations
year should be stronger than it was in
the past 12 months. Continued interest
Met Expectations
from investors is welcome news for
emerging managers as well as established
Fallen Short of Expectations
fundraisers heading into 2017 with
optimistic fundraising targets.
66%
Overall, investors agree that their private
debt investments lived up to their initial
performance expectations. As a result,
investors retain a generally positive
perception of the asset class. The vast
majority (93%) of respondents stated While almost all institutional investors the goals of the fund and the underlying
that the performance of their private interviewed share a positive or at borrowers must be clearly aligned, which
debt portfolios either met or exceeded least neutral view of private credit as generally occurred over 2016 according
expectations in 2016 (Fig. 6.1), an increase a whole heading into 2017, sentiment to the satisfaction scores reported by
from 86% in December 2015. More on the quality of opportunities within investors.
investors also have a positive view of the a given strategy can vary. For example,
asset class: 68% of respondents maintain the prominence of the direct lending Fund terms have continued an evolution
a positive perception of private debt, segment has certainly made private debt towards becoming more investor friendly,
compared with 54% at the end of 2015 investing more accessible being at the as transparency has become a uniform
only 4% view the asset class negatively relatively lower-risk end of the alternatives mandate from the alternative investor
(Fig. 6.2). Furthermore, investor confidence spectrum. Strategies that sit higher on the community, which continues to gain
in the asset class remains high, with 29% risk/return spectrum, such as distressed traction at the negotiating table. The
reporting an increase in confidence over and venture debt, still offer the potential majority (54%) of investors have seen
the past 12 months, while just 10% are less for impressive returns targeted by some changes in management fees over the past
confident in the ability of private debt to investors. In order for fund managers to year, while 27% have experienced more
meet portfolio objectives. match or surpass investor expectations, transparency at fund level (Fig. 6.3).
Fig. 6.2: Investors General Perception of the Private Debt Fig. 6.3: Investor Views on Areas of Fund Terms and Conditions
Industry that Have Changed over the Past 12 Months
Management Fees 54%

4%
More Transparency at Fund Level 27%
Performance Fees -Amount 19%

28% Positive
Performance Fees -
19%
Neutral How They Are Charged
Manager Commitment to Fund 15%

Negative
68% Lock-up Period 8%
Hurdle Rate 8%
0% 20% 40% 60%

53

UNIVERSE
T he private credit space has
continued to evolve in the past
decade as institutional investors are
Fig. 6.4: Institutional Private Debt Investors by Location, 2016 vs. 2017
100%
6% 8%
90% 6%
increasingly taking advantage of the fund 9%
opportunities that have arisen globally 80%
26%
since 2007. Preqins Private Debt Online 25% Rest of World
70%
contains detailed information on more
60%
than 2,400 institutional investors that Asia
are either actively investing in private 50%
debt opportunities or looking to make 40%
Europe
their maiden commitment. This marks
30% 62% 58%
an increase of more than 500 individual North America
investors over 2016, showing heightened 20%
interest in the asset class.
10%
LOCATION OF ACTIVE INVESTORS 0%

Jan-16 Jan-17
While 83% of private debt investors
Source: Preqin Private Debt Online
are located in either North America or
Europe, this represents a decrease of five
Fig. 6.5: Institutional Private Debt Investors by Type
percentage points from the previous year,
indicating that investors in Asia & Rest of
World are increasing their exposure to the Wealth
Manager Private Sector
asset class (Fig. 6.4). Family 7% Pension Fund
Office 16%
8%
Three of the 10 largest global investors ate
riv alth
(by current allocation to private debt) e
WP
Other Public Pension

are among the 17% of investors based 12% Fund
in Asia & Rest of World: South Koreas KB 14%
Insurance allocates nearly a quarter (24%) Asset Manager
In
sti
of its $23bn in AUM to the asset class, and 5% tutional
Ivory Coast-based African Development Fund of Funds

Manager Foundation
Bank allocates 15% of $35bn. 6% Insurance 13%
Endowment
Company Plan
MAKE-UP OF ACTIVE INVESTORS 9% 9%
Institutional investors continue to
outnumber private wealth investors Source: Preqin Private Debt Online
in private debt: 85% of investors are
institutions, while 15% manage private AUM; public and private sector pension will likely continue to grow, as average
wealth. Public and private sector pension funds contribute the largest amounts target allocations exceed average current
funds represent the largest proportions of aggregate capital at 32% and 24% allocations for all investor types.
of investors in the asset class, 14% and respectively (Fig. 6.6).
16% respectively, followed by foundations Family offices continue to have both the
(13%). AVERAGE ALLOCATIONS highest current allocation (10.7%) and
The average current and target allocation the highest target allocation (20.7%) as a
While foundations account for the third of a private debt investor currently stand proportion of AUM (Fig. 6.7). This can be
largest proportion of active private debt at 4.7% and 9.2% respectively. However, attributed to fewer restrictions, increased
investors by type, they contribute the third there is significant variation among flexibility and their appetite for higher
smallest amount of aggregate capital. investor types, typically associated returns compared to other asset classes.
Comparatively, pension funds tend to with the amount of AUM and years Specifically, two New York-based single-
account for larger proportions of invested of experience in the asset class. Total family offices are looking to make new
capital as a result of typically larger capital commitments to private debt private debt commitments in the coming

6. PRIVATE DEBT
year. The Laughren Group is looking to Fig. 6.6: Proportion of Aggregate Capital Currently Invested in Private Debt by Investor
invest in opportunities in Asia, while Type
Interventure Capital Group is targeting
new distressed debt funds over the
coming year.
Private Sector
Pension Fund
Public and private sector pension funds, 24%
which together make up the largest
proportion of investors, are both looking Public Pension
to increase their allocations to private Fund Wealth Manager
32% Private Wealth 3% 2.0%
debt. Public pension funds in particular Family Office 1.2%
have an average target allocation that
Asset Foundation
is two percentage points higher than Manager 1.7%
their current allocation, which would 6% Endowment Plan
account for an additional $128bn in capital Insurance Fund of Funds 1.7%
Company Managers
commitments. 11% 9%
Wealth managers are looking to increase

their current allocation by an average of Source: Preqin Private Debt Online
five percentage points to meet targets,

which is the second highest average
Fig. 6.7: Institutional Investors Current and Target Allocations to Private Debt by Type
increase among investor types.
25%
Average Allocation to Private Debt
PRIVATE WEALTH INVESTORS 20.7%

Private wealth investors account for 15% 20%
of the private debt allocator universe by
(As a % of AUM)
Average Current
number, and constitute 3% of aggregate 15% Allocation
12.2%
capital currently committed to the asset 10.7% 10.7%
class. On average, private wealth investors 10% 8.7% Average Target
6.1% Allocation
are significantly under-allocated to private 5.8% 5.2% 4.7% 5.1%
5% 4.2% 4.5%
debt: the average current allocation to the 3.5% 3.2% 2.8% 2.6%
asset class among private wealth investors
is 8.3% of AUM, while the average target 0%
Public Pension
Company
Wealth Manager
Asset Manager
Endowment Plan
Private Sector
Family Office
Foundation
Insurance
Pension Fund
allocation is 15.7% (Fig. 6.9).

Fund
North America is home to 61% of private

wealth firms active in private debt, while
Europe is the headquarters for 28%. Even Source: Preqin Private Debt Online
with the growth and expansion globally
that private credit funds have seen in the
Fig. 6.8: 10 Largest Public Pension Funds by Current Allocation to Private Debt (As at January 2017)
Assets under Management Current Allocation to Private Debt
Investor
($bn) ($bn)
New York State Teachers' Retirement System 109.5 8.8
California Public Employees' Retirement System (CalPERS) 303.4 5.0
Arizona State Retirement System 34.5 4.1
Oregon State Treasury 69.3 3.6
Texas County & District Retirement System 25.6 3.1
Washington State Investment Board 84.1 3.0
San Bernardino County Employees' Retirement Association 8.7 2.9
Florida State Board of Administration 178.5 2.7
New Mexico Educational Retirement Board 11.7 2.3
Maryland State Retirement and Pension System 46.3 2.1
55
past few years, North America and parts Fig. 6.9: Private Wealth Investors Current and Target Allocations to Private Debt by
of Europe remain highly concentrated Type
regions of investor activity in the asset 25%
class. It is unclear when or if the types of
Average Allocation to Private Debt

opportunities offered by current private 20.7%
20%
lenders will appeal to the private wealth
(As a % of AUM)
investment base in sizeable markets 15.7% Average Current
such as China, but given the amount 15% Allocation
of potential capital available there
will certainly be continued efforts by 10.7% 10.7% Average Target
managers. 10% Allocation
8.3%
LOCATION OF PRIVATE WEALTH FIRMS 5.8%

ACTIVE IN PRIVATE DEBT 5%
11% 0%
All Private Wealth Family Wealth
Office Manager
28%
Fig. 6.10: Private Wealth Investors Outlook on Private Debt
61% 100%
90%
80% 40%
47%
70% 54%
North America Increase
Europe 60%
No Change
Asia & Rest of World 50%
40%
OUTLOOK 47%
40% Decrease
30%
According to our December 2016
20% 46%
interviews with institutional investors in
private debt, 89% of respondents plan to 10%
13% 13%
either maintain or increase the amount of 0%
capital they invest in private debt in the No. of Fund Manager Private Debt Capital Allocated
next 12 months compared to the previous Relationships in the Allocations in to Private Debt:
year. A similar proportion (92%) plan to Next Two Years the Long Term 2017 vs. 2016
maintain or increase their allocations in Source: Preqin Private Debt Online
the longer term. Private debt continues to

expand as an asset class, as the number
of investors (of all types and sizes) that
Fig. 6.11: Private Debt Investors by Source of Allocation
are involved in private credit funds has
continued to grow throughout 2016.
2% 3% Separate Private Debt Allocation

There is no reason to expect a change to 11%
6%
the trend of increasing investor appetite General Alternatives Allocation
for private debt through 2017. Managers 11%
based in North America and Europe should Part of Multiple Allocations
continue to see successful fundraising
cycles as long as regulatory environments Part of Private Equity Allocation
remain conducive to non-bank lending
14%
activity. Part of Fixed Income Allocation
53%
Part of Opportunistic Allocation
Other

6. PRIVATE DEBT

H eading into the new year, the majority
of investors remain confident in
their private debt investments. This is
2017, most (57%) of which expect to make
their commitments in the first quarter of
the year (see page 60).
INVESTOR ALLOCATIONS
As more investors put capital into the
private debt asset class over the next
positive news for fund managers that 12 months (Fig. 6.12), average investor
have been steadily increasing the amount While the outlook for the asset class in allocations are also expected to increase
of capital deployed into private lending, both the near and long term is generally notably: 62% of respondents plan to
as fundraising efforts should continue to positive, an increasing number of investors increase their allocations to private debt
yield sufficient capital. have noted key issues to watch within the over the longer term, while just 8% plan
market in the coming year. The proportion to decrease their allocations (Fig. 6.14).
The majority (57%) of investors plan to of investors that see the valuations Expansion of the capital pool is certainly a
commit more capital to the asset class in of private debt vehicles as a key issue great sign for fund marketers, which may
2017 than in 2016, while a further 32% will increased by nine percentage points from now see access to different investor types
commit the same amount of capital (Fig. the previous year to 40% (Fig. 6.13). Other that have either not been able to or have
6.12). Nearly all (90%) investors currently areas of concern include deal flow (36%), chosen not to venture towards private
active in private debt plan to make performance (33%) and regulation (28%). debt funds in the past. Furthermore,
additional investments in the asset class in the small proportion (8%) of investors
Fig. 6.12: Investors Expected Capital Commitments to Private

Debt Funds in the Next 12 Months Compared to the Previous 12 Fig. 6.13: Investor Views on the Key Issues Facing Private Debt in
Months 2016 vs. 2017
Valuations 31%
40%
11% Deal Flow 27%
36%
Performance 25%
More Capital 33%
Regulation 11%
28%
Same Amount Volatility/Uncertainty 10%
32% of Capital in Global Markets 26%
57% Availability/Pricing 9%
Less Capital of Debt Financing 22%
Transparency 10%
7%
0% 10% 20% 30% 40% 50%
2016 2017
Fig. 6.14: Investors Intentions for Their Private Debt Allocations Fig. 6.15: Number of Private Debt Fund Commitments Investors
over the Long Term Typically Make Each Year
8% 2%
10% 16%
Less than 1
Increase Allocation
14% 1-2
30% Maintain Allocation

3-4
Decrease Allocation 5-6

62%
7 or More
59%
57
planning to decrease their allocation is a Fig. 6.16: Investor Views on the Difficulty of Identifying Attractive Investment
useful gauge with which to measure the Opportunities Compared to 12 Months Ago
projections and confidence of institutional
investors in relation to private debt fund
commitments. 9%
More than half (59%) of respondents 31% Harder to Find Attractive

typically make one or two private debt Opportunities
investments per year, and 26% commit
to three or more (Fig. 6.15). The average No Change
investor commits to just over two

private debt funds per year. However, Easier to Find Attractive
almost a third (31%) of respondents now Opportunities
believe that it is harder to find attractive
60%
investment opportunities in private debt
than it was a year ago, whereas only 9%
claim that it is easier (Fig. 6.16).

MACROECONOMIC FACTORS
AFFECTING PRIVATE DEBT
The macroeconomic factors private debt Fig. 6.17: Investor Views on the Macroeconomic Factors that Had the Biggest Impact
investors are most concerned with for the on Their Private Debt Portfolios in 2016 vs. Predictions for 2017
year ahead are fairly consistent with the 90%
82%
factors that they believe had the greatest 80%
73%
impact on their portfolios over the past 70%

year. Unsurprisingly, the largest proportion 60%
(82%) of investors stated that low interest 2016
50%
rates affected their portfolios the most 40% 36% 34% 32% 2017
in 2016 73% expect the same in 2017 30%
22%
(Fig. 6.17). The potential impact of central 20% 16% 14% 16%
bank intervention (34%) and the US 9% 8% 9% 8% 7% 5%
10% 4% 4%
economy (32%) are also primary concerns 2%
0%
for investors moving into the new year.
Low Interest Rates
Brexit Vote
PriceVolaitilty
Central Bank
StockMarket
Geopolitical
US Economy
Currency Market
China's Economy
Intervention
Landscape
Commodity
Slowdown in
Volatility
Additionally, the Brexit vote remains a

Volatility
peripheral issue for investors, with just 8%

expecting it to have a big impact on their
private debt portfolios in 2017, compared
with 16% that believe it impacted their
portfolios in 2016.
OUTLOOK INVESTORS CHANGE IN CONFIDENCE INVESTORS PERFORMANCE

The past 12 months have displayed some IN PRIVATE DEBT OVER THE PAST 12 EXPECTATIONS FOR PRIVATE DEBT IN
encouraging results for the private debt MONTHS 2017 COMPARED TO 2016
industry. As for investor confidence, almost
3x as many surveyed investors now have
more confidence in private debt (29%) 10% 10%
19%
than less confidence (10%). Furthermore, 29%
almost twice as many respondents believe
that private debt will perform better in the
coming year (19%) as those that believe
it will perform worse (10%). This building
confidence, along with the capital and
allocation growth expected in the coming 61%
70%
year, indicates a steadying market that
still has growth potential a promising
combination for solid returns for investors Increased Confidence Will Perform Better
and fund managers alike. No Change Will Perform About the Same
Reduced Confidence Will Perform Worse

6. PRIVATE DEBT
SAMPLE PRIVATE DEBT INVESTORS TO WATCH IN 2017
59
CAISSE DE PENSIONS DE LTAT DE
WOODMAN ASSET MANAGEMENT VAUD WEGA SUPPORT
Type: PD Fund of Funds Manager Type: Public Pension Fund Type: Family Office
Location: Zug, Switzerland Location: Lausanne, Switzerland Location: Munich, Germany
AUM: $2.6bn AUM: CHF 11bn ($11bn) Considering investing in distressed,
Targeting direct lending, special situations Will commit 10-20 CHF in the next 12 mezzanine, direct lending and special
and distressed debt vehicles, on a global months, with a strong preference for situations funds focused on Europe and
scale. private debt fund of funds vehicles on a North America.
global scale.
HELABA INVEST
Type: Investment Company
Location: Frankfurt, Germany DIC CORPORATION PENSION FUND
AUM: 160bn ($168bn) Type: Private Sector Pension Fund
Seeking direct lending funds within Location: Tokyo, Japan
Europe. The investment company typically AUM: JPY 117bn ($995mn)
commits up to 20mn per investment. Focusing on senior debt vehicles across
the US and Europe.
FTLIFE INSURANCE COMPANY
TREA CAPITAL PARTNERS Type: Insurance Company
Type: PE Fund of Funds Manager Location: Hong Kong
Location: Barcelona, Spain AUM: $3.0bn
AUM: 41mn ($43mn) Looking to make its maiden private debt
Looking to commit 5mn to a Spain- commitment. Will consider opportunities
focused direct lending fund in the next 12 globally, targeting USD-denominated
months. funds.
WHITMAN COLLEGE ENDOWMENT PRI PENSIONGARANTI CHRISTIAN SUPER
Type: Endowment Plan Type: Private Sector Pension Fund Type: Superannuation Scheme
Location: Walla Walla, Washington, US Location: Stockholm, Sweden Location: Sydney, Australia
AUM: $500mn AUM: SEK 3.0bn ($324mn) AUM: AUD 1.1bn ($832mn)

Will invest $25mn in one or two distressed Will invest SEK 25-50mn in up to two Will invest in mezzanine or distressed debt
debt funds in the next 12 months. direct lending funds globally. vehicles in the US market.

SELECT PRIVATE DEBT FUNDS
31%
46%
20%
Through internal
31%
Mainly internal
33%
Mix of internal
13%
Mainly approaches
3%
or consultant recommendations, some recommendations some internal
recommendations external approaches recommendations

INVESTORS PLANS FOR THEIR NEXT
84
fund proposals each year
FUND COMMITMENT:
2018+
10%
H2 2017
CONSIDER WHEN LOOKING FOR A
15%
52%
PRIVATE DEBT FUND MANAGER: H1 2017
75%
record.
FIRM TRACK
Q1 2017
58% RECORD

strategy of a fund.
TEAM STRATEGY
EXPERIENCE 57%

REJECT A GP:
Fees/terms
7%
2
commitments to private debt

SECTION SEVEN:
NATURAL RESOURCES
CRITICAL YEAR AHEAD FOR

NATURAL RESOURCES
I n December 2016, Preqin conducted
interviews with over 130 institutional
investors in natural resources to
OPECs decision to curb the supply
of crude oil should help dampen the
volatility witnessed in markets and may
year, natural resources still lags behind
most other alternative asset classes in
terms of investor satisfaction and the
understand their views on the industry, help natural resources fund managers to ability of investments to meet their
including their satisfaction with deploy capital over 2017. Fund managers expectations. If 2017 provides a more
investments, their future activity and the seeking capital in the year ahead must be stable macroeconomic environment
key issues affecting the asset class. able to demonstrate strong performance where fund managers can start to deliver
over a difficult period for the industry. sufficiently diversified, inflation-hedging
2016 has seen significant variations Those already on the road will find this returns, such as those that infrastructure
in commodity prices, an uncertain challenging, considering many investors funds have been capable of providing
geopolitical outlook and growth concerns are not actively looking to increase their over the long term, then we could
in major markets such as China, all of capital commitments in the short term. potentially see a significant improvement
which have affected the returns from Unless performance improves, the industry in sentiment and more commitments to
unlisted natural resources vehicles and could see a reduction in assets; a greater natural resources funds in the future.
been noticed by significant numbers proportion of institutions interviewed are
of surveyed investors as a concern. looking to reduce their allocation to the
Volatility/uncertainty in global markets asset class in the long term than increase
and performance were both cited by the it.
greatest number of respondents as the key
issues that affected the natural resources While investors perception of the industry
asset class in 2016. improved slightly over the course of the
INVESTOR SATISFACTION FUTURE PLANS EXPECTATIONS FOR 2017
54% 26% 35%

of investors felt the performance of their of investors will invest more capital in of investors believe their natural
natural resources portfolio fell short of natural resources in 2017 than they resources portfolios will perform better
expectations in 2016. did in 2016, compared to 22% that will in 2017, while 21% believe they will
invest less. perform worse.
?
22% 23% 41%
of investors believe it is currently easier of investors will reduce their natural of investors believe volatility/uncertainty
to find attractive opportunities than resources allocation over the longer in global markets is the key issue in the
12 months ago, the largest proportion term, compared to 19% that will natural resources industry for 2017 an
among investors in all alternative asset increase it. equal proportion believe performance is
classes tracked by Preqin. the key concern.

7. NATURAL RESOURCES
SATISFACTION WITH
NATURAL RESOURCES
T he natural resources asset class has
faced sustained challenges over
recent years, the repercussions of which
Despite this improvement in the
perception of the asset class, the majority
(54%) of investors surveyed felt the
market volatility and the fall in oil prices on
their natural resources portfolios; nearly
two-thirds of surveyed investors felt that
have been felt by institutional investors performance of their natural resources the performance of their natural resources
allocating to the asset class. portfolios had fallen short of their investments over the past three years had
expectations over the past year only fallen short of expectations, although a
A fifth of surveyed investors have a 10% saw their expectations exceeded (Fig. third found that investments had met
negative view of the asset class at present 7.2). Of all alternative asset classes tracked expectations.
the second largest proportion among by Preqin, only hedge fund investors
all alternatives albeit this represents an (66%) were more disappointed with their Unless performance improves, the industry
improvement on 33% of investors at the investments. could see a reduction in assets a greater
end of 2015 (Fig. 7.1). Correspondingly, proportion of institutions surveyed are
there has been a rise in the proportion of Despite improved perception of and looking to reduce (23%) their allocation
investors with a positive view of natural satisfaction with natural resources over the to the asset class over the long term than
resources, up from 17% in December 2015 past 12 months, investors are concerned increase it (19%, Fig. 7.4).
to 29% at the end of 2016. over the potential impact of commodity
Fig. 7.2: Investor Views on Natural Resources Portfolio

Fig. 7.1: Investors General Perception of the Natural Resources Performance over the Past 12 Months Relative to Expectations,
Industry, 2015 vs. 2016 2015 vs. 2016
100% 100% 2%
10%
90% 17% 90%
29%
80% 80% 36%
70% 70% 37% Exceeded

Positive Expectations
60% 50% 60%
50% Neutral 50% Met

51% Expectations
40% Negative 40%
30% 30% 62% Fallen Short of

54% Expectations
20% 20%
33%
10% 20% 10%
0% 0%
Fig. 7.3: Investors Change in Confidence in the Ability of Natural

Resources to Achieve Portfolio Objectives in the Past 12 Months, Fig. 7.4: Investors Intentions for Their Natural Resources
2015 vs. 2016 Allocations over the Long Term, 2015 vs. 2016
100% 100%
15% 12%
90% 90% 19%
28%
80% 80%
Increased Increase
70% 70%
60% 60%
58% 68%
50% No Change in 50% 58% Maintain
Confidence 49% Allocation
40% 40%
30% Reduced 30% Decrease

20% 20%
27% 23% 23%
10% 20% 10%
0% 0%
63
KEY ISSUES IN 2017

W ith significant shocks to commodity
markets in recent years, as well as
challenging geopolitical conditions, 41%
and private debt investors was cited by
only 23% of natural resources investors.
With some natural resources assets
the largest impact on their portfolios in
2016 (Fig. 7.7). Furthermore, the same
proportion believe that price volatility will
of surveyed investors cited volatility/ struggling in the current environment, have the biggest impact in 2017.
uncertainty in global markets as the there are those that investors feel
key issue for the asset class in 2017 (Fig. managers can acquire at relatively cheap However, investors are not in agreement
7.5). Correlated to this has been the prices, namely metals & mining, energy as to whether this volatility will have a
underperformance of unlisted natural and water assets (Fig. 7.6). However, the positive or negative effect, illustrating
resources vehicles in the last two years, majority of investors across each strategy the general uncertainty surrounding the
and therefore an equal proportion feel assets are appropriately priced. natural resources asset class. A third of
of surveyed investors stated that surveyed investors believe that managers
performance is a key concern. As discussed, commodity price volatility may be able to capture the upside in the
had a major impact on natural resources year ahead, although 28% believe it will
Valuations the biggest concern among portfolios: 77% of respondents cited it negatively impact portfolios, as it has done
private equity, real estate, infrastructure as the macroeconomic factor that had in prior years (Fig. 7.8).
Fig. 7.5: Investor Views on the Key Issues Facing Natural Fig. 7.6: Investor Views on the Pricing of Natural Resources
Resources in 2017 Assets by Strategy
100% 5% 4% 4%
Volatility/Uncertainty in Global Markets 41% 10% 9% 6%
90% 6%
Performance 41% 17%
80% 29% 28% Very Expensive
20% 26%
Exit Environment 30%
70%
Valuations 23% Expensive
60%
Regulation 22% 69%
50% 63% About Right
Fees 19% 50%
40% 57% 60% 52%
Public Perception of Industry 16% Cheap
30%
Availability/Pricing of Debt 14% 20% Very Cheap
Deal Flow 14% 10% 17% 20% 19%
10% 8% 13%
Commodity Pricing 11% 0%
Metals &
Agriculture
Renewable
Timberland
Water
Energy (excl.
Mining
Renewable
Governance 11%
Energy
Energy)
0% 20% 40% 60%

Fig. 7.7: Investor Views on the Macroeconomic Factors that Had

the Biggest Impact on Their Natural Resources Portfolios in Fig. 7.8: Investor Views on the Impact of Commodity Prices on
2016 vs. Predictions for 2017 Their Natural Resources Portfolios over 2017
Commodity PriceVolatility 77%

77%
Slowdown in China's Economy 30%
37%
30% 28%
16% 33%
Central Bank Intervention Positive Impact
23%
Low Interest Rates 32%
21% Neutral
Currency MarketVolatility 23%
16%
9% Negative Impact
StockMarketVolatility
14%
Brexit Vote 5%
5%
0% 20% 40% 60% 80% 100% 39%
2016 2017

INVESTOR ACTIVITY
IN 2017
I t appears surveyed investors are taking
a wait-and-see approach towards
investment in natural resources funds
INVESTOR PREFERENCES
Active natural resources investors will
predominantly seek exposure to the asset
As expected, energy funds are sought
by the largest proportion (88%) of active
natural resources investors (Fig. 7.12),
over 2017. Just over half are planning class through unlisted funds (86%, Fig. with other strategies registering interest
to commit the same amount in 2017 as 7.10), a reflection of the relative youth of from 20-25% of the active investor
they did in 2016, while relatively even the industry. Nearly half (49%) of active population. Of the active energy investors,
proportions will invest more than they did investors will seek investments globally the vast majority (88%) seek exposure
the previous year (26%) as will invest less in the year ahead (Fig. 7.11). With regards to renewable energy, with only 28%
(22%, Fig. 7.9). to specific regions, traditional markets targeting natural gas investments and 23%
are favoured for investment in 2017: 42% seeking exposure to oil investments.
and 40% of fund searches issued target
Investors are North America and Europe respectively,
taking a wait-and- compared with 19% of investors seeking
see approach in 2017 Asia-Pacific-focused funds and 6%
targeting all other regions.
Fig. 7.9: Investors Expected Capital Commitments to Natural

Resources Funds in the Next 12 Months Compared to the Fig. 7.10: Routes to Market Targeted in the Next 12 Months by
Previous 12 Months, 2015 vs. 2016 Natural Resources Investors
100% 100%
90% 90% 86%
24% 26%
80% 80%
70% 70%
More Capital
60%
60% 35%
50%
50% Same Amount
52%
of Capital 40%
40% 31%
Less Capital 30%
30%
20%
20% 41% 9%
10%
10% 22%
0%
0% Direct Investment Listed Funds Unlisted Funds
Dec-15 Dec-16 Route to Market Targeted
Source: Preqin Investor Interviews, December 2015 - December 2016 Source: Preqin Natural Resources Online
Fig. 7.11: Regions Targeted in the Next 12 Months by Natural Fig. 7.12: Strategies Targeted in the Next 12 Months by Natural
Resources Investors Resources Investors
60% 100%
90% 88%
49%
50% 80%
42% 70%
40%
40% 60%
50%
30% 40%
30% 25% 22%
19% 21% 18%
20% 20%
12% 10%
10% 6% 0%
Metals &
Timberland
Water
Agriculture/
Energy
Mining
Farmland
0%
North Europe Asia-Pacific Rest of Emerging Global
America World Markets
Region Targeted Strategy Targeted
Source: Preqin Natural Resources Online Source: Preqin Natural Resources Online
65
STRATEGIES AND
GEOGRAPHIES TARGETED
STRATEGIES Fig. 7.13: Strategies* that Investors View as Presenting the Best Opportunities
Institutional investors in natural resources
were asked about where they felt the 80%
best opportunities were in the asset class 70%

70%
in the coming year. Due to the relative
youth of the unlisted natural resources 60%
industry as a distinct asset class, primary
50%
unlisted fund commitments remain the
predominant method for gaining exposure 40%
to the industry. As such, the majority (70%)
30%
of surveyed investors see primary vehicles
as providing the best opportunities (Fig. 20% 16% 16%
7.13). 11%
10%
While debt/mezzanine funds have grown 0%

out of private equity to form a separate Primary Secondaries Debt/Mezzanine Fund of Funds
asset class in its own right, real estate
Strategy
and infrastructure debt funds, and to Source: Preqin Investor Interviews, December 2016
a lesser extent natural resources, have
only recently started to emerge. Only relatively recent oil price decline and the REGIONS
11% of respondents feel these vehicles ongoing trend towards clean sources of There is a clear consensus among
are presenting the best opportunities at energy mean that the largest proportion natural resources investors that the best
present. of institutional investors surveyed opportunities are found in North America
believe that a subset of the energy (73%, Fig. 7.15). Investors preference for
SECTORS industry renewables presents the best North America may stem from Trumps
As the largest natural resources market opportunities (Fig. 7.14). campaign plan to invest in the US energy
by a long way, energy will continue to industry, which may provide opportunities
play an important role in the portfolios of Beyond energy and renewable energy for managers looking for projects. While
natural resources investors. Thirty-eight investment, 22% of institutions believe Europe is seen as the next most promising
percent of respondents believe energy timberland-focused funds are presenting region, it is not too far ahead of Latin
funds will present the best opportunities the best opportunities, just ahead of America, Asia and Australasia.
in the coming months; however, the lack metals & mining (19%), water (16%) and
of detail on crude oil production limits, the agriculture/farmland-focused funds (16%).
Fig. 7.14: Sectors* Investors View as Presenting the Best Fig. 7.15: Regions* Investors View as Presenting the Best
Opportunities Opportunities
50% 46% North America 73%
45%
40% 38% Europe 27%

35%
30% Latin America 23%
25% 22%
19% Asia 23%
20% 16% 16%
15% Australasia 20%
10%
Africa 7%
5%
0% Middle East 3%
Metals &
Renewable
Timberland
Water
Agriculture/
Energy
Mining
Farmland
Energy
Global 17%
0% 20% 40% 60% 80%

Sector Proportion of Respondents
*Respondents were not prompted to give their opinion on each strategy/sector/region individually but to name those they felt best fit these categories; therefore, the results display the
strategies/sectors/regions at the forefront of investors minds at the time of the survey.

SAMPLE NATURAL RESOURCES INVESTORS TO WATCH IN 2017
67
PFA PENSION
Type: Insurance Company MERCER PRIVATE MARKETS
ENVIRONMENT AGENCY PENSION Location: Copenhagen, Denmark Type: Infrastructure Fund of Funds
FUNDS AUM: DKK 587bn Manager SWEDBANK PENSION
Type: Public Pension Fund Looking to invest DKK 37bn (5bn) over Location: Zurich, Switzerland Type: Private Sector Pension Fund
Location: Bristol, UK the next five years in order to reach its AUM: $21.8bn Location: Tallinn, Estonia
10% alternatives target, focusing on Seeking Asia- and North America-focused AUM: 700mn
AUM: 3.1bn
renewable energy and infrastructure water and energy investments. Targeting a timberland fund as an inflation hedge
Current/Target Allocation to NR: 1%/2%
Considering further investment as it assets. against traditional investments. Has a preference
aims to meet its 2% target, investing in for domestic investments.
timberland, energy and agriculture funds
on a global scale.
SHINKIN CENTRAL BANK
3SISTERS SUSTAINABLE MANAGEMENT Type: Bank
Type: Real Assets Fund of Funds Manager Location: Tokyo, Japan
Location: Philadelphia, US AUM: JPY 34.6tn
AUM: $33mn Considering investment in developed
Targeting agriculture, energy and water- markets-focused unlisted natural
related vehicles on a global basis. resources funds through its private equity
allocation.
SACRAMENTO COUNTY EMPLOYEES RETIREMENT
SYSTEM HYUNDAI MARINE & FIRE INSURANCE
Type: Public Pension Fund Type: Insurance Company
Location: Sacramento, US Location: Seoul, South Korea
AUM: $7.7bn AUM: KRW 30tn
Current Allocation to NR: 0.6% Investing both directly and through
Looking to commit to 3-6 unlisted real assets funds globally, unlisted funds in renewable energy assets
which include infrastructure and natural resources vehicles. in developed markets that include North
America, Australia and Europe.
COMPAGNIA DI SAN PAOLO
Type: Foundation
TEXAS TECH UNIVERSITY SYSTEM Location: Turin, Italy
PARAGON OUTCOMES MANAGEMENT
ENDOWMENT AUM: 6.5bn
Type: Wealth Manager CHRISTIAN SUPER
Type: Endowment Plan Current Allocation to NR: 1.5%
Location: New York, US Type: Superannuation Scheme
Will target agriculture, energy, metals & mining,

Location: Lubbock, US
AUM: $1.1bn Location: Sydney, Australia
AUM: $1.1bn timberland and water investments globally,
Plans to invest in global-focused real typically through unlisted equity vehicles. AUM: AUD 1.1bn
Current/Target Allocation to NR: 10%/10% asset funds targeting power and energy Will invest domestically and internationally in
Not targeting a specific strategy but has assets. a wide range of natural resources sectors.
previously shown a preference for energy-
and metals & mining-focused funds.

SELECT NATURAL RESOURCES FUNDS
20% 46%
22%
Through internal
31%
Mainly internal
27%
Mix of internal
18%
Mainly approaches
2%
161
FUND COMMITMENT:
2018+
26%
CONSIDER WHEN AL
LOOKING FOR A NATUR H2 2017
50%
RESOURCES FUND MANAGER:
13%
record.
48% EXPERIENCE

FIRM TRACK
RECORD
61%
strategy of a fund.

REJECT A GP:
Fees/terms
8%
2
commitments to natural resources

PREQIN INVESTOR OUTLOOK:

ALTERNATIVE ASSETS
H1 2017
PREQIN
Alternative Assets Data & Intelligence
Preqin provides information, products and services to fund managers,

investors, consultants and service providers across six main areas:
Investors Allocations, Strategies/Plans and Current Portfolios

Fund Managers Funds, Strategies and Track Records
Funds Fundraising, Performance and Terms & Conditions
Deals/Exits Portfolio Companies, Participants and Financials
Service Providers Services Offered and Current Clients
Industry Contacts Direct Contact Details for Industry Professionals
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info@preqin.com
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Preqin Investor Outlook Alternative Assets H1 2017

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alternative assets. intelligent data.

2: PRIVATE EQUITY 6: PRIVATE DEBT

DATA PACK FOR PREQIN INVESTOR OUTLOOK: ALTERNATIVE ASSETS, H1 2017

To download the data pack, please visit:

RESPONDENTS BY INVESTOR LOCATION RESPONDENTS BY INVESTOR TYPE

NORTH AMERICA PUBLIC PENSION FUND

14% PRIVATE SECTOR PENSION FUND

10% 13% ASSET MANAGER

2 Preqin Ltd. 2017 / www.preqin.com

INVESTORS WANT GREATER

D espite strong institutional investor

4 Preqin Ltd. 2017 / www.preqin.com

PEDRO ANTONIO ARIAS

20% 16% 14% 16% 14% 11% 9%

57% 51% 61% 36% 37% 40%

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

INSTITUTIONAL INVESTORS PLANS FOR ALLOCATIONS IN THE LONGER TERM

Reduce Allocation Increase Allocation

6% Private Equity 48%

6 Preqin Ltd. 2017 / www.preqin.com

Performance Expectations in Previous

Private Debt Fell Short

Worse About the Same Better

Positive Neutral Negative

INSTITUTIONAL INVESTORS PLANS FOR THE COMING YEAR

11% Private Equity 40%

2017 PREQIN GLOBAL ALTERNATIVES REPORTS

alternative assets. intelligent data.

FUND TERMS AND ALIGNMENT

Hedge Real Private Natural

Change in Favour of Fund Manager Change in Favour of Investor

17% Private Equity 37%

24-HOUR CLIENT SUPPORT

Find out more about our products and services:

8 Preqin Ltd. 2017 / www.preqin.com

FUND SELECTION AND

45% Private Equity 5%

AVERAGE NUMBER OF COMMITMENTS INSTITUTIONAL INVESTORS MAKE PER YEAR

AVERAGE NUMBER OF MARKETING DOCUMENTS INSTITUTIONAL INVESTORS RECEIVE PER MONTH

Private Equity Always Meet

Infrastructure Mostly Fail to

10 Preqin Ltd. 2017 / www.preqin.com

POSITIVE BEGINNINGS FOR

SATISFACTION WITH KEY CHALLENGES PLANS FOR 2017

84% 70% 83%

48% 45% 58%

12 Preqin Ltd. 2017 / www.preqin.com

10% 13% 10% 19% 15% 11%

Fig. 2.3: Investors Change in Confidence in the Ability of Private

70% Increased 70% Increase

10% 10% 19% 16%

INVESTOR ACTIVITY IN 2017

Fig. 2.5: Investors Expected Capital Commitment to Private

20% 2018 or Later

23% $500mn or More

14 Preqin Ltd. 2017 / www.preqin.com

Increase India 20%

KEY ISSUES IN 2017

Fig. 2.14: Investor Views on the Difficulty of Identifying

Fig. 2.15: Investor Views on the Macroeconomic Factors that

16 Preqin Ltd. 2017 / www.preqin.com

FUND TERMS AND ALIGNMENT

Fig. 2.18: Investor Views on the Areas of Fund Terms and