Changes in Investors’ Target Allocations to Private Equity – May 2013

by Joanna Nye

  • 07 May 2013
  • PE

Private equity investors have continued to make new commitments to the asset class in 2013, as demonstrated by the $117bn in investor capital raised by private equity funds that have held a final close since the start of the year.

LPs’ target allocations to private equity have fluctuated over the past five years, having dipped between 2009 and 2011, and then gradually increased in 2012. Institutional investors’ (excluding fund of funds managers) average target allocation stood at 11.2% of total assets at the end of 2009, gradually falling to 9.8% in 2010, and again to 9.7% in 2011. 2012 saw LPs’ average target allocation to private equity increase for the first time in a number of years, increasing to an average of 10% of total assets. The previous fall in LPs target allocations may be a result of legislative changes such as the Dodd Frank Act and Basel II, as well as a continued economic volatility impacting on the investment strategy of investors.

Since the start of 2013, LPs’ average target allocation to private equity has continued to increase, with the average target allocation currently standing at 11.4% of total assets, an increase of 1.4 percentage points over the last six months. This demonstrates that institutional investors have maintained an appetite for the asset class, and are continuing to allocate a significant portion of their total assets to private equity funds.

The recent increase in LPs’ target allocations to private equity is reflected in Preqin’s Investor Outlook: Private Equity, H1 2013, when 28% of LPs planned to increase their private equity allocation over the next 12 months, with 33% expecting to increase their allocation in the longer term.

LPs’ average target allocations to private equity look likely to continue to increase over the coming year, with a number of LPs having recently made changes to their target allocations. San Antonio Fire and Police Pension Fund recently increased its target allocation to private equity from 6% of total assets to 7%, and Harvard Management Company has increased its target allocation from 23% of total assets to 29%.

The increase in investors’ average target allocations to private equity since the start of 2013 demonstrates LPs’ continued interest in the asset class. Preqin’s Investor Intelligence database currently tracks over 5,000 active investors in private equity funds, with 933 looking to make new fund commitments in the near future, with a further 563 LPs planning to make new fund commitments on an opportunistic basis over the next 12 months.

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