Around the world, institutional allocations to real estate will increase over the next two years, according to limited partners surveyed in the eighth annual Russell Investments Survey on Alternative Investing.
In North America, investors will, on average increase to 7.3 percent in 2009 from the current 6.7 percent, according to the survey. Leading the pack are endowment and foundation, who will raise allocations to 7.1 percent from 5.9 percent.
In Europe, investors plan to increase strategic allocations to real estate to 9.7 percent from 8.9 percent. Australian respondents will move to 10.5 percent from 9.6 percent, while Japanese respondents will move to 5.7 percent from 4.7 percent.
Russell Investment noted that respondents noted a strong desire to “diversify their commitments outside of their local region,” according to a press release.
Karl Smith director of real estate for Russell Investments, said that “many respondents express[ed] interest in globally diversified real estate investments with access through private real estate funds and more liquid publicly traded real estate securities (REITs).”
But private equity returns are set to trump fellow alternative asset classes, according to the survey.
Institutional respondents felt the asset class will in the near future provide better returns than hedge funds or real estate funds.
“Across the globe, respondents' return expectations are strongest for private equity, with expectations for hedge funds and real estate remaining steady,” according to the press release. “Mean return expectations for private equity worldwide vary between 8 percent and 13 percent, with North American and European respondents expressing the greatest optimism for performance of this asset class.”
Those surveyed subsequently predicted their allocations to the asset class will increase through 2009. John Bailie, managing director of Russell’s alternative investments, which includes its private equity fund of funds business, Pantheon Ventures, said fund of funds “remain the preferred route to access both private equity and hedge funds, with limited in-house investment resources dedicated to these strategies by even the world’s largest institutions”.
Leveraged buyouts were the most popular private equity fund strategy among respondents: LBO funds accounted for 71 percent of North American LP private equity commitments, up from 57 percent in 2005. In Australia they rose to 41 percent from 26 percent in the same period, and in Japan, LBO commitments rose from 47 percent to 63 percent. Buyout fund commitments fell slightly in Europe, though expansion capital commitments increased to 12 percent from 6 percent, while commitments to ‘other’ types of private equity funds, including mezzanine, secondaries and special situations, fell from 15 percent to 11 percent.
“The private equity community witnessed enormous volumes of LBO activity over the past two years, but investors may have come to the conclusion that the best and biggest buyouts have already occurred,” Jay Pierrepont, managing partner at Pantheon Ventures-Russell Investments, said in a statement. “Institutional investors still have high expectations for private equity and are forecasting, with the exception of Japanese respondents’ expectations for 2007 and 2008, double digit returns, for the next two years derived predominately from venture capital and secondary opportunities.”
The Russell survey was published based on the responses from more than 300 limited partners around the world.