Government agencies are an important source of capital for the private equity industry, with commitments often driven less by potential returns and diversification than that of a typical LP. Many government agencies access the private equity asset class for strategic reasons, such as to target employment in a region, push forward the development of a new industry, or to help alleviate poverty.
Overseas Private Investment Corporation is the US government’s development finance institution and aims to use its capital to solve critical world challenges, advance US foreign policy and help private US companies enter new and emerging markets. The corporation has recently committed $66mn to DFG Capital 3, a Brazil-focused growth vehicle and $75mn to Accession Mezzanine Capital III, a mezzanine fund targeting opportunities in Central and Eastern Europe.
At present there are 117 government agencies that invest, or are considering investment, in private equity. Unlike the typical private equity LPs, the largest proportion of government agencies are based in Asia and Rest of World. The region accounts for 44% of the total, with Europe accounting for 32% and North America 23%.
Government agencies active in private equity typically have large allocations to the asset class, partly explained by some government institutions being solely focused on private equity investments. The average target allocation to the asset class of the investor type is 30.1% of total assets, with an average current allocation of 27.7%.
Interestingly, government agencies are far more willing to consider working with emerging private equity fund managers than many other LP types, perhaps due to many looking to target new and emerging markets and industries. Sixty-eight percent of government agencies are open to investing in first-time funds, with a further 13% that are either considering doing so or that will work with spin-off teams. This compares with only 33% of all LPs that will invest with first-time fund managers; however another 31% consider doing so, or will work with spin-off teams.