Private equity is on track for sluggish growth over the next five years as inflation and macroeconomic uncertainty take their toll on investments and investors shift capital to lower-risk asset classes, a new report from Preqin Inc. predicts.

Preqin forecasts continued but slower expansion of assets under management for the global private equity industry, totaling $7.6 trillion by 2027. That would represent an 80% increase from the industry's collective AUM today, which the report estimates at $4.2 trillion.

The forecast relies on an annualized growth rate of 13.5% between 2021 and 2027 — a significant slowdown from the 15.4% annualized growth Preqin estimated for private equity from 2015 to 2021.

"Overall, our forecasts suggest that the sweet spot that private equity markets have enjoyed over the last few years is likely over," the report states.

The slowdown is expected to affect alternative assets broadly, if unevenly, hitting venture capital and private debt in addition to private equity.

Fundraising to slow

Rougher macroeconomic conditions will also lead private equity fund managers to hold onto portfolio companies longer, the report said, slowing the pace of exits and the distribution of returns to investors. That, in turn, ties up capital that could otherwise be reinvested in new funds.

The cycle is expected to slow private equity fundraising considerably, according to the firm. Preqin's model projects industry fundraising totals will decline 21.5% in 2022 compared to 2021, then drop again by a smaller percentage in 2023 before returning to "modest annual growth."

If the forecast plays out, it would be a major turnaround from 2021, when private equity fundraising jumped 33% year over year to a global total of $561 billion.

Another factor in the fundraising slowdown is the denominator effect, according to the report. As institutional investors' public holdings declined in value earlier this year, private holdings became a larger portion of their overall portfolios, limiting the allocation of new capital to private equity.

Additionally, institutional investors, a key source of capital for private equity funds, "are becoming more risk averse," prompting some to shift money out of private equity and into real assets and private debt, which are viewed as safer bets, the report said.