According to a survey by the Centre for Management Buyout Research (CMBOR), while 41 per cent of UK institutions are currently committing capital to unquoted equities, that figure will drop to 38 per cent by 2010. Many pension funds and insurance companies are nevertheless planning to increase allocations to private equity over the next two to five years.
The study, sponsored by European independent private equity fund of funds manager Adveq, found that respondents on average sought to generate a 12.8 per cent absolute return and expect the returns from private equity to be 419 basis points higher than returns from publicly-quoted investments. Greater return relative to other asset classes was cited as the top reason for investing in private equity. Portfolio diversification was highlighted as the second most important driver.
While 28 per cent of respondents presently investing in private equity allocate less than 2 per cent of their total AUM to the class, the numbers planning to invest at this level will rise to 24 per cent going forward. Today, 3 per cent of institutions invest in excess of 10 per cent of their total assets in private equity.
Direct fund investments are the most favoured route to market today, accounting for 52 per cent of total investments. This figure, however, is expected to drop to 44 per cent in the future.
By contrast, fund of funds investment - 31 per cent at present – is expected to rise by 7 per cent, with most regions (bar central Europe) witnessing increased appetite from investors.
Western Europe is cited as being a major beneficiary – likely to see future commitments rising to 35 per cent. Direct company investments, which are reported to be the least popular form of investment, are predicted to remain broadly unchanged going forward, although increasing in the UK in the future.
Fifty-four per cent of private equity commitments by UK institutions are channelled towards the UK market today, with this figure expected to stay largely unchanged. While planned commitments for Western Europe and Asia will trend slightly lower in the medium term, the distribution to the US is projected to surpass the 20 per cent mark in the future.
André Jaeggi, managing director at Adveq in Zurich commented: “The appetite among UK investors to increase their average allocation to the sector is a clear endorsement of the long-term benefits of the asset class. Despite the increasing availability of other alternative assets, private equity will remain a key asset class for UK investors.”
RA
