North American institutional investors raised $749.7 billion, nearly half (49 per cent) of the $1.53 trillion total private capital raised globally between the second half of 2022 and the end of May 2023, according to a report by Preqin.

It found the weakest period for deal activity since the start of the coronavirus pandemic was between the third quarter of 2022 and May 2023, noting during that period, total private equity deal value ($229.5 billion) for North America was 55 per cent lower compared to the same period last year. Venture capital deal activity also declined in this timeframe, averaging $41.7 billion per quarter since June 2022, down from an average of $90.9 billion per quarter from June 2021 to June 2022.

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The 2022 economic downturn in public equity markets knocked institutional investors’ pension plan asset allocations off balance, as nearly 20 per cent declines in U.S. equities and a 15 per cent fall in investment-grade debt dragged most public asset portfolios under their policy targets.

By the end of the fiscal year, most investors found themselves below their public asset targets and above target in private assets, noted the report. There were significant deviations in the $5 trillion U.S. public pension system in 2022. In particular, the average allocation to public equities was 3.9 per cent below the average policy target, the widest deviation from targets since 2009. Conversely, private equity was over-allocated by an average of 1.1 per cent following a year in which the asset class returned, on average, 19.6 per cent for the same group of plans.

The report also found the fundraising environment in North America is becoming a case of haves and have-nots as target allocations among pension plans appear to be moving at different paces. For instance, the average target allocation for North American pension plans in the top quartile, by assets under management, for private equity was 13 per cent, while those in the bottom quartile showed an average allocation of seven per cent.

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Funds raised by the 10 largest managers increased in every asset class in between 2018 and May 2023, said the report. The 10 largest managers in private equity took 30 per cent of limited-partnership commitments in the latter period, up from 17 per cent between 2018 to 2022. The largest venture capital firms took more than a quarter (28 per cent) of capital commitments after accounting for only 10 per cent in 2018 through 2021. The largest managers also continued to dominate in infrastructure and natural resources and, to a lesser extent, in private debt.

The report projected global alternative assets will grow at an annual rate of 11.9 per cent between 2021 and 2027 to $18.3 trillion. It also expects North America’s contribution to this projection ($11.4 trillion) to outpace that growth at 12.7 per cent annually; however, the report predicted this growth will slow in the near term and accelerate later in the decade.

It also noted high residential rents are largely supporting returns in the real estate market, despite rising interest rates threatening asset values. While the U.S. Consumer Price Index has fallen from mid-2022 highs to a 3.1 per cent annual growth rate as of June 2023, the rent component remained at nearly 8.3 per cent year-over-year growth rate as of July 2023.

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