Institutional LPs to increase private equity allocations

Forty percent of institutional investors plan to increase their allocations to private equity in the next few years, according to a survey from PricewaterhouseCoopers.
 
The survey also revealed that 41 percent of investors are preparing to boost their exposure to real estate in the same period, while 35 percent will increase commitments to infrastructure and commodities and 33 percent will increase allocations to hedge funds.

US pension funds have been keen to diversify their portfolios by expanding their exposure to private equity, with groups such as the Employees Retirement System of Texas creating a new allocation for the asset class and groups like the Washington State Investment Board dramatically increasing their target allocation. In a recent staff report, The California State Teachers’ Retirement System referred to private equity as the “high octane” of its investment portfolio.

However, the PwC survey of 226 global investors and asset management executives also warned that the economic downturn was making itself felt, with 11 percent of respondents saying they would reduce allocations to private equity in the next three years. One-fifth of investors said they would reduce their exposure to real estate, while just 16 percent of investors said they would make smaller allocations to hedge funds against 15 percent for commodities and 10 percent for infrastructure.

The report went on to warn that 28 percent of investors and asset managers had seen a “significantly negative” impact on their real estate asset base owing to the credit crunch. By comparison, just 14 percent of private equity investments had been impacted in the same way.

Pars Purewal, UK investment management and alternatives leader at PwC, said the credit crunch was focusing investors’ minds on the operational structure of funds, not least over issues of transparency.

“When returns start to flatten, as they have in many asset classes, investors focus more intently on operational infrastructure,” he said, adding in a statement that investors could only expect to become more “exacting” in the future.