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Change in Investors’ Allocations to Private Equity over the Past Year – January 2014

by Karun Ahluwalia

  • 09 Jan 2014
  • PE

Over the past 12 months, the investor universe has continued to make substantial commitments to private equity funds, remaining resilient and steadfast in their desire to diversify their investment portfolios. However, Preqin’s Investor Intelligence notes the differing trends in the average current and target allocations between certain investor types; this being the result of many overarching factors ranging from recent regulatory changes, such as Basel III and the Volcker Rule (part of the Dodd-Frank Act), to the general economic environment, all of which would lead to fluctuations in investor confidence in the asset class. 

Family offices maintain both the highest current and target allocations to private equity as a percentage of total assets, compared to other investor types, at 28.0% and 31.7% respectively, this being an increase from 24.5% and 28.9% in Q1 2013. Unlike other investor groups that require approval from committees or shareholders, family offices generally uphold relative flexibility with their investment strategies, which in part explains the notable gap between the average current and target allocations to private equity.

Insurance companies is another investor group which has increased both their average and current target allocations to the asset class over the past 12 months, from 2.6% and 3.1% of total assets to 2.7% and 3.3% respectively. This may be somewhat of a surprise due to the introduction of regulations such as Solvency II, which calls for reduced allocations to the inherently illiquid asset class of private equity. However, Preqin’s latest annual survey showed that 87% of the investor universe feel that the recent regulatory changes have yet to have an impact on its private equity investments.

As global economic conditions remain precarious, some investors have increasingly looked to the private equity asset class for capital gains that will outpace the returns from public equities and low interest rates. In addition to family offices, public pension funds have increased their allocations to private equity, on average, over the last few years. In Q1 2012, public pension funds had average current and target allocations of 5.6% and 6.7% respectively; these have since risen to 6.2% and 7.3%. On the other hand, foundations have slightly decreased their allocations to private equity over the last 12 months from 11.7% and 12.0% of total assets to 11.6% and 11.9%.

Interestingly, the average current allocation to private equity of endowment plans is currently the same as it was in Q1 2013, at 12.9%, but there has been a notable rise in the average target allocation, from 12.4% to 13% over the same period. Employment of the ‘Yale Model’, which incorporates high levels of portfolio diversification and an emphasis on illiquid assets, such as private equity, has remained prevalent in recent years and is likely to have influenced the long term investment approaches of endowment plans as limited partners.

It is apparent that although average current and target allocations to private equity have predominantly increased or remained the same over the past 12 months, there are variations depending on each investor type. With factors such as new regulations and continued volatility in the financial markets having differing effects on certain investors, Preqin expects allocations are likely to continue to fluctuate in 2014.

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