If global pension funds were to be considered as one sovereign entity, they would become the third largest economy in the world, behind only China and the US. According to Preqin’s Investor Intelligence, both public and private sector pension funds that are known to be currently investing in private equity manage assets worth $13.3tn, with the total assets of public pension funds representing the bulk of these funds (60%).
The majority of pension funds active in private equity are located in North America (61%) and Europe (30%), with a small proportion in Asia (3%) and a remaining minority (6%) located in countries outside these regions. Currently, these pension funds are, on average, under-allocated to the private equity asset class. Their current average allocation to private equity stands at 5.7%, below the average target allocation of 6.8%, which indicates that these institutional investors will likely seek out more opportunities in the foreseeable future.
Pension funds’ most preferred private equity investment vehicles are funds of funds, with 68% of pension funds stating a preference for this strategy, followed by buyout (60% of pension funds) and venture capital (54%). Unsurprisingly, these institutional investors tend to favour the more traditional private equity fund types, with fewer pension funds indicating a preference for secondaries (40%), distressed private equity (38%) or growth funds (37%). As experience continues to grow, and investors continually look for different ways to increase return on their investments, we may see the less traditional fund types gain more interest.
In terms of geographic preferences, the majority of pension funds are seeking opportunities in traditional markets such as North America (84% of pension funds) and Europe (72%). Just 48% of investors are looking to invest in Asia, with only 40% of investors seeking opportunities in emerging markets, which could be a reflection of the economic situation in these regions that are heavily dependent on commodity exports, and the unease surrounding the recent collapse of the Chinese stock market and the devaluation of the yuan.
Pension funds remain a vital pool of capital for private equity fund managers, with their preferences having a lasting impact on the asset class. The growing sophistication of these institutional investors coupled with their ever increasing experience in the private equity asset class mean less traditional fund types and geographic regions could well be sought after in a bid to maximize returns and further diversify portfolios.