German institutions keen on private equity

Insurance companies are looking to increase their private equity allocations fourfold over the next two to five years, a report says.

A study compiled by Munich-based fund of funds manager Golding Capital Partners suggests that the majority of German insurance companies see the outlook for private equity as promising or very promising.

The firm interviewed more than 30 insurers in September and October 2001 and found that, whilst a large majority has invested in the asset class for some time, the general consensus was to substantially increase the level of exposure. The institutions said that their private equity allocations would rise from an average of 1 per cent to more than 4 per cent over the next two to five years. To build their private equity investment programmes, the insurers would predominantly be looking to fund of funds vehicles to carry out the work on their behalf.

Golding also quizzed private banks and asset managers for the study and found that fund of funds, while already popular – 43 per cent of the insurers and 30 per cent of the banks and managers had used this type of vehicle – were the firm favourite for companies looking to make initial commitments to private equity.

Golding said 50 per cent of insuance companies and 27 per cent of banks and fund managers looking to enter the private equity market were considering fund of funds as a way in.

Very few of those polled  – just 15 per cent of the insurers and 7 per cent of the asset managers and banks – were considering entering enter the private equity market by themselves.

When asked about their preferred type of private equity investment product, most participants said they would be looking to avoid early stage funds given the risks involved and invest in later stage situations instead.

Geographically, these companies wanted to keep their investments close to hand, saying European investments should make up almost 60 per cent of an ideal portfolio, with another third invested in the US. Other major economic regions such as Asia or Latin America were not expected to play a significant role, they said.

The findings of the report provide further evidence that institutional investors are unfazed by recent turbulences in the private equity market place. If plans to significantly increase allocation levels were indeed implemented over the coming years, the industry would experience a significant net inflow of new capital.

In December 2001, Frank Russell Company and Goldman Sachs published their fifth Report on Alternative Investing, which showed that investors globally are increasingly looking to private equity to diversify their allocation and boost return on investment.