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Investors Under-Allocated to Private Equity – February 2013

by Tom Carr

  • 12 Feb 2013
  • PE

With fundraising conditions continuing to remain challenging for many fund managers on the road in 2013, it is reassuring for fund managers to know that a large proportion of investors in private equity are currently under-allocated to the asset class. Preqin's Investor Intelligence database indicates that, of the investors that have a specific target allocation to private equity, a significant 43% (excluding fund of funds managers) are under their target allocation to the asset class and are therefore likely to be making new fund commitments to increase their exposure to the asset class. Furthermore, nearly a third (32%) of LPs are currently at their target allocation to private equity and are also likely to allocate further capital to the asset class to maintain their allocation as they receive distributions for existing investments. A quarter of investors are over-allocated to private equity.

As well as a larger number of investors being under-allocated to private equity than over-allocated, the average current and target allocations to private equity of the LP universe also indicates that investors have spare capacity for private equity commitments. The average current allocation to the asset class of all LPs (excluding fund of funds managers) is 11.3%, whereas on average LPs have 10.8% allocated to private equity.  

Public pension funds look likely to continue being an important source of capital for GPs on the road over the coming years, accounting for nearly a third (31%) of all investors under-allocated to private equity. Of all public pension funds, over half (51%) are currently below their target allocation to private equity, with less than a third (29%) over-allocated to the asset class. Other significant LP types with capacity to make further private equity investments include private sector pension funds and endowment plans, which each make up 18% of the total number of LPs under-allocated to private equity. Foundations provide a further 14% of the total. Interestingly for GPs raising capital, the investor type with the highest proportion of LPs under-allocated to private equity is sovereign wealth funds, of which 60% are below their target allocation to private equity.

Geographically, Asia and Rest of World-based investors have a larger proportion of investors under-allocated to private equity (54%), compared with North America (45%) and Europe (36%). However, Asia and Rest of World-based investors make up only 11% of the total number of investors under-allocated to private equity. North America provides a sizeable 67% of investors below their target allocation to the asset class, with Europe providing the remaining 22% of LPs.

The outlook for fund managers looking to secure new private equity fund commitments over coming years is reasonably positive, with a significant number of LPs under-allocated to private equity and therefore having spare capacity for new commitments. Furthermore, a significant number of LPs are at their target allocations to the asset class and are therefore likely to consider allocating further capital to the asset class to maintain their allocation over the longer term.

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