Allocation to private equity looks set to boom, survey shows

According to new research, the majority of institutional investors are planning to boost their allocation to private equity over the next five years, proving the strength of the asset class.

The survey of 118 worldwide institutional investors was carried out by financial firm State Street Global Exchange and found that 59 per cent wished to invest more in private equity by the year 2021.

As the investors feel increasing pressure to deliver strong returns, they are looking to private equity in order to do this. Indeed, said JR Lowry, the Europe, Middle East and Africa head of State Street Global Exchange: "Investors are acutely aware of the need to diversify their portfolios in the search for yield. This is evidenced by the push into alternatives we are seeing."

Just 15 per cent of the investors surveyed for the research said that they planned to decrease their exposure to the private equity asset class over the coming five years. One of the barriers holding back the planned investment in private equity is a lack of transparency in the sector, some of the surveyed investors reported.

The State Street research found that the private equity industry, which currently manages around $3.5 trillion, continues as it is in terms of transparency levels, with 28 per cent of investors saying they may decide to lower their funding allocations to the asset class. State Street's research found that seven in 10 institutional investors were looking for increased levels of transparency across the board from private equity managers regarding the performance of the underlying assets.

However, despite concerns regarding transparency, the many positives linked to the investment arena are continuing to entice increasing numbers of investors each year and the transparency can be improved over the coming years. Amin Rajan, chief executive of consultancy Create Research, said: "There is ample scope for improving transparency. Too much secrecy has inadvertently given rise to the perception that many private equity houses rip off their clients."

Private equity looks set to provide returns of around 9 per cent, which represents a value almost twice that of equities and three times the expected return rate for bonds. Indeed, says Mr Rajan, private equity’s "main appeal is high uncorrelated absolute return". More than 38 per cent of investors reported that their private equity investments had outperformed their expectations over the last years. A further 64 per cent of the investors questioned for the research reported that their private equity portfolio met their expectations in 2015.

A related study, carried out by the data provider Preqin earlier this month, found that investors were overwhelmingly happy with their private equity investments.

Christopher Elvin, the head of private equity products at Preqin, said: “With many investors looking to increase their allocations, sheer demand should sustain healthy fundraising, and the biggest challenge now facing the industry lies with fund managers trying to deploy this wall of committed capital.”

Among the major institutional investors planning to drastically boost their exposure to assets including private equity over the course of this year is the City of Philadelphia pension fund, which oversees the retirement funds of more than 64,000 current and former employees. Currently, 'real assets' make up 7.2 per cent of its total portfolio, but it has plans to increase this tally to 9 per cent over the coming few years.

The Preqin investor sentiment survey questioned a mix of public and private pensions, foundations and endowments, insurers, asset managers, family offices, funds of funds and banks. Around 42 per cent of the institutional investors were based in North America, while 35 per cent were located in Europe, 15 per cent in Asia and 8 per cent in the rest of the world.

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