US-based endowments and foundations are optimistic about private equity despite concerns over high valuations and expensive costs associated with the asset class.
Nearly half, or 43 percent, said they plan to increase their exposure to private equity at some point in the future, according to a third-quarter survey conducted by Boston-based investment consultant NEPC and released on Monday.
This is significantly higher than the 30 percent that said so in the previous private equity-focused survey by NEPC released in the first quarter. In addition, 53 percent of respondents said they are planning to maintain their allocation, while only 4 percent said they are decreasing their allocation.
“This quarter every year is when people are planning for the next year, and they are more interested in private equity for 2017,” NEPC partner Kristin Reynolds told Private Equity International. “Part of the reason is because returns across [endowments’ and foundations’] portfolios have been flat or negative, leading to uncertainty about the near term. So, they want to lock up their money for a longer period.”
The strong inclination towards private equity among these two types of limited partners came despite worries surrounding soaring valuations and fund-related costs.
More than half, or 56 percent, of the respondents picked current valuations as their biggest worry, while fund costs represented the second-most common concern this year, at 42 percent, according to NEPC.
“It was a surprise that so many people were saying valuations are very high in private equity, but are planning to allocate more to it,” Reynolds said. “This is because, despite high valuations, people still need to earn a certain level of return.”
She added that the strong support for growth equity and venture capital, the two most-picked strategies by the survey respondents for their future allocation, reflects the quest for higher returns. In the poll, 47 percent of endowments and foundations said they are emphasising growth equity for their future investments, and 44 percent indicated venture capital.
The third most popular strategy in the survey was buyouts, at 39 percent, followed by energy, at 36 percent.
According to Reynolds, energy was favourable among the respondents because they think current oil prices are unsustainable and are waiting for more distressed energy opportunities.
Some 35 percent picked distressed investment while 30 percent of the respondents are looking to secondaries as an emphasised strategy for future investments.
From a geographical perspective, 62 percent of respondents said their main focus has been the US this year. About a quarter, or 24 percent, picked global, while just 4 percent targeted emerging markets.
None indicated Europe or Asia as a geographic focus for 2016, which Reynolds said was a surprising finding.
NEPC polled 95 endowments and foundations online in late September and early October. NEPC serves 118 endowments and foundations representing an aggregate assets under management of $57 billion as of 30 June. Aside from its Boston headquarters, the consultant has offices in Atlanta, Charlotte, Chicago, Detroit, Las Vegas and San Francisco.