Preqin’s Investor Intelligence currently tracks 497 endowments that are investing in private equity, representing approximately 10% of all investors active in the asset class. Endowment plans are the fourth most prevalent type of investor, after foundations, private sector pension funds, and public pension funds, with combined total assets in excess of $480bn. Of these endowments, 451 are based in North America and represent 96% of the total assets of all endowments.
On average, endowments tend to allocate a greater proportion of their assets to private equity than other types of investor. The average target allocation of all investor groups (excluding fund of funds managers) is 9.4% of total assets, whereas for endowments it stands at 12.6%. Likewise, the average current allocation of all LPs is 8.9% of total assets, but stands at 13% of total assets for endowments. This can likely be explained by investment strategies such as the ‘Yale Model’, which tend to focus on illiquid assets, such as private equity and other alternatives, in order to achieve above average returns over the longer term.
A core part of the Yale Model relies on a high level of portfolio diversification in order to reduce risk, and while a strategy of diversification is common across many investors, endowments tend to display a higher level of diversification in terms of preferences than the average investor. When looking at fund type preferences, 55% of endowment plans target fund of funds vehicles, compared to just 41% of all investors. A greater proportion of endowments also state a preference for venture, buyout, distressed debt and natural resources vehicles, indicating that endowments as a whole target a broader range of fund types than the average investor in private equity. This discrepancy is also evident when it comes to geographic preferences, with 53% of endowments stating a preference for private equity vehicles investing on a global scale, compared with only 40% of all investors that indicate such a preference.
Despite high levels of regional concentration, endowments continue to influence the private equity asset class on a global scale. Going forward, it will be interesting to see whether or not these investors maintain above-average target allocations to the private equity asset class over the longer term.