Long-Term Target Allocations of Investors in the Private Equity Asset Class – January 2015

by Scott Gibbs

  • 08 Jan 2015
  • PE

Investors continue to show interest in the private equity asset class, as demonstrated by the $485bn in capital committed to funds closed during 2014. It is clear that consistent, long-term interest from LPs will be critical in maintaining current levels of growth in the industry. 

Preqin’s Investor Intelligence online service currently tracks 5,495 institutional investors that are investing, or considering investing, in private equity. As of December 2014, the average target allocation to the private equity asset class was 10.9% of total assets, slightly lower than the previous year (11.2%). Alongside this slight fall in target allocations, which has been falling for several years now, we are witnessing a growing number of LPs that are currently operating at an allocation below their target. At the end of 2013, 45% of investors were operating below their target allocation; a year later that figure had risen to 51% of LPs. This could be a reassuring sign for private equity firms, as it shows that there is LP capital available for new private equity funds in 2015. However, falling target allocations may also suggest a lack of viable investment opportunities, resulting in investors holding back on capital commitments. 

Determining a long-term target allocation is a meticulous process for LPs and is contingent on a varying number of internal and external factors, affecting target allocations differently depending on the type of investor involved. For example, the Solvency II Directive, which sets out the liquidity requirements of insurance companies, will affect any that operates a private equity program, due to the illiquid nature of the asset class. By separating investors by type, we can see that as of the end of 2014, government agencies had the highest average target allocation to private equity at 45.6%. This was followed by investment companies (30.7%) and family offices (27.2%). Notably, the biggest changes in target allocations over the last year were seen by government agencies, whose target allocation fell from 53.7% at the end of 2013, and by wealth managers, whose target allocation, despite rising from 19.9% in 2012 to 27.5% in 2013, fell again to 21.4% in 2014. 

Additionally, the number of investors that are currently operating below their target allocation to the asset class appears to be increasing. With stronger returns and a greater level of choice for LPs when investing in private equity, it will be interesting to see if this leads to a greater level of fundraising in 2015, as LPs look to close the gap between their current and target allocations.

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