You know what they say: With high risk comes high reward. But the important question for any LP is this: Is it worth that risk?
When it comes to venture capital, limited partners don’t seem to think so. That’s what a new Preqin report on alternative investing in North America, released this morning, suggests. Limited partners, surveyed in June, are split on whether to allocate capital into venture funds or delay until 2024, according to the report.
“Respondents appear to think that VC can outperform private equity in the next 12 months, but also acknowledge that it may not be worth the risk,” the report reads, noting that more than eight out of 10 VC investors said that the meager exit environment was the main challenge to returns over the next year.
Here are four takeaways from Preqin’s latest report on alternatives:
1. LPs are increasingly turning to brand-name managers
Fundraising to private funds has decreased across the board, according to Preqin, with capital raised by private funds continuing to trend lower since the end of 2022. That pullback encompasses private equity, VC, and infrastructure funds.
But notably, LPs are shifting their attention to larger, more established “brand-name” managers, according to Preqin, which reported that, while funds raised by the ten largest managers had increased in every asset class between 2018 and May 2023, the allocation going to those mega-managers has grown significantly in the last year and a half, in particular.
In the 17 months ending in May 2023, the ten largest PE managers garnered 30% of LP commitments, up from 17% in 2018 to 2022. The largest VC firms fundraised 28% of capital commitments, up from 10% in the period between 2018 to 2021.
“I think that if you’re going to commit less capital to private equity in a more pessimistic market, you are going to go with the larger partners you’ve worked with in the past and have comparatively more faith that you will continue to perform,” Charles McGrath, AVP of Research Insights at Preqin, said in an email.
Who’s benefiting? The Preqin report specifically calls out KKR, Thoma Bravo, Brookfield Asset Management, ICG, and Advent International—all of whom name pension plans as some of their largest investors.
2. The East Coast is the new king of early-stage deals
In 2022, there were more early-stage deals in New York City than in San Francisco for the first time, according to Preqin data. While NYC may still lag in the later stages, New York, Los Angeles, and Toronto are all becoming bigger players in the early rounds. “This should over time translate into a greater share of late-stage deals being sourced outside San Francisco,” according to Preqin.
3. Thoma Bravo is leading the pack on A.I. deals
Thoma Bravo, Vista Equity Partners, and New Mountain Capital are some of the managers scooping up shares of A.I. companies, with A.I. investments making up at least 6% of their total deals, according to Preqin.
Blackstone Group has invested a whopping $56.8 billion in A.I.-focused deals—the most in aggregate among North American managers—though it’s a smaller percentage of its overall deal flow than some of the other players.
4. Private debt still attractive
All the LP respondents said they plan to invest at least the same amount of capital into private debt funds in the next year as they did last, with more than half saying they plan to invest more. And exposure to distressed debt, in particular, is on the rise, as high-interest rates put pressure on companies to sell assets at attractive prices.
See you tomorrow,
Jessica Mathews
Twitter: @jessicakmathews
Email: jessica.mathews@fortune.com
Submit a deal for the Term Sheet newsletter here.
Joe Abrams curated the deals section of today’s newsletter.
