Preqin’s Investor Intelligence online service currently tracks 551 endowment plans that are investing in private equity, representing 9.4% of all investors active in the asset class, with total assets under management of $655bn. Endowment plans are the fourth most prevalent type of investor globally by quantity after foundations and public and private pension funds. Of these endowments, 501 are based in North America, which represents 95% of total assets held by endowments globally.
Endowment plans’ appetite for private equity, when measured by the average target allocation to the asset class, has been variable, but has generally shown an upward trend over the last five years. However, the percentage difference between the average and target allocation to private equity is the greatest it has been since 2010. The chart below shows that as of January 2015, the average target allocation to private equity by endowment plans was 11.7% of total assets, versus an average target allocation of 12.8%.
Data from Preqin’s Investor Intelligence also suggests that endowment plans seek a greater level of diversification in their exposure to private equity compared with the strategies of other institutional investors. Geographically, 50% of endowment plans active in private equity have shown a preference for global exposure to private equity, compared with 36% of the overall private equity investor universe. Additionally, over half (51%) of these endowment plans have shown a preference for fund of funds vehicles. This is significantly higher than the proportion of the overall investor pool active in private equity, where 34% have shown a preference for fund of funds vehicles. The larger fund of funds exposure could be potentially due to endowment funds having fewer resources available to them, and are therefore looking towards fund of funds managers with greater expertise in direct investments.
With the average current allocation to private equity sitting below the average target allocation, it may appear, on the surface, that endowment plans have an immediate appetite for increased private equity investments. However, with recent record levels of cash distributions, LPs face real challenges in recycling vast sums of capital in addition to navigating the saturated private equity fundraising market. With the additional factor of record amounts of dry powder (committed capital yet to be deployed), the industry is seeing investors trim down their private equity allocations in this heated market.