Changes in Investors’ Allocations to Private Equity Over the Past Year – December 2012

by Francesca Braganza

  • 18 Dec 2012
  • PE

Over the past 12 months, investors around the world have continued to make commitments to private equity funds in order to further diversify their investment portfolios. Despite many LPs remaining active in the asset class, there continues to be variations in the average current and target allocations between certain investor types and regions.

In December 2011, Preqin’s Investor Intelligence revealed that LPs’ average current allocation to private equity was 9.9% of total assets, and the average target allocation was 10.9% (excluding fund of funds managers). Over the past 12 months, the average current allocation and target allocation has increased to 10.6% and 11.1% respectively; indicating LPs have placed more capital in the asset class and plan to continue doing so, in order to meet their target allocations in the future.

North America-based LPs have the highest average current and target allocations to private equity at 10% and 10.3% of total assets respectively, whereas Europe-based investors have the smallest average current and target allocations to the asset class at a 6% and 6.7% of total assets respectively. This is perhaps reflective of the different investors types located in each region, as well as the ongoing sovereign debt crisis in the eurozone, with many LPs remaining cautious about committing new capital to the asset class. Asia and Rest of World-based LPs are below their target allocations by the most significant amount, with an average current allocation of 7.9% of total assets and an average target allocation of 9.1%, indicating that investors in this region are likely to increase the amount of capital they commit to the asset class in the near future, in order to move towards their target allocations.

With regards to investor types, public pension funds are one example of an investor type that have increased both their average current and target allocations to the asset class over the past 12 months, from 5.6% and 6.7% of total assets to 6.3% and 7.1% respectively. As traditional asset classes have become less appealing to this investor type more recently, private equity has played an increasing role within public pension funds’ portfolios. However, some investor types have decreased their allocations to private equity, such as insurance companies. From December 2011 to December 2012, insurance companies’ average current allocation fell from 2.7% of total assets to 2.6%, while target allocations decreased from 3.5% to 3.1% of total assets. This is likely due to the impending Solvency II regulation that will limit the amount of capital this investor type can hold in illiquid assets, such as private equity.

It is clear that although average current and target allocations to private equity have increased over the past 12 months, there are variations between regions and investor types. With regulation affecting certain investors, and continued volatility in the financial markets a concern for many other investors, it is clear that average current and target allocations are likely to continue to fluctuate in 2013.

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