Private equity managers have become more selective in their investments as they seek to juggle investor demand in a hot market.

With high valuations and large amounts of capital in the market, some managers are taking a more conservative approach when it comes to investment decisions and are targeting higher-quality assets, according to panelists discussing fundraising at the Venture Capital and Private Equity 0100 Conference held in Dublin in May.

Private capital dry powder reached the $2 trillion mark at the end of June 2018, according to Preqin, and a record 5,106 buyout deals were completed globally last year.

But the fundraising pace will diminish in the coming years, said Laurent Guérineau, chief operating officer and co-head of the private investors' team at Eurazeo SE. He believes with so much dry powder in the market and large amounts of M&A taking place, prices are going up and returns are going to go down. "I'm sorry to say that, but that's the way it's going to go," Guérineau said.

Limited partners, or LPs, are looking to reduce their number of manager relationships as they seek the best returns possible. There is demand for general partners with good track records, Stephen Branagan, Ireland head for fund-of-funds manager Pantheon said, and some are looking to write bigger investment checks and concentrate down their portfolio of managers. But LPs investing in funds of funds are also looking for diversification in their funds portfolio.

"The challenge is balancing the chasing after those big, good name general partners on an investment side and matching those allocations to the investor appetite on the other side," Branagan said.

LPs also have somewhat conflicting desires when it comes to how their managers are currently investing. Jonathan Cosgrave, Carlyle Group LP managing director and co-head of its Ireland fund, said the "classic response" from LPs is that they respect discipline at this late stage of the cycle, but on the other hand, they want the firm to get their money to work. "That's always the difficulty in a sense that investors want both things, which is natural," he said.

In the firm's search for deals, Cosgrave said the quality bar for businesses it is looking to back is higher as managers search for businesses that are going to be "very strong" through a potential downturn.

Cosgrave said investors are looking at assets that have more of a banded return, with less upside but less downside risk at this stage in the cycle.

Guérineau said his firm has been "very consistent" with its investment process. Eurazeo looks to generate 2x to 2.5x its investment, and if those returns don't appear likely, it will pass. "We've lost many deals on the pricing," he said.

A conservative approach to leverage is also being adopted by private equity firms as they look ahead to market uncertainty, and LPs are looking at a firm's approach to leverage when they consider investing in a fund, the panelists said.

Guérineau said in the event of a downturn, businesses and investors were better off with low leverage, adding that there is always an opportunity to re-leverage a company down the line.