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Institutional investors to increase PE allocations to 6.5% by 2010

Allocations to the private equity and real estate asset classes are expected to rise by more than 20 percent over the next two years, a study by JP Morgan Asset Management has shown, as institutional investors reveal such strategies are no longer ‘alternative’ at all.

Allocations to alternatives are set to rise by more than 20 percent over the next two years, with average allocations to private equity and real estate expected to top 6.5 percent and 5.8 percent respectively by 2010.

A study by JP Morgan Asset Management has revealed that alternatives currently make up about 18 percent of an investors’ portfolio, but that is expected to rise to 22 percent by 2010.

The survey of 191 institutions showed that average allocations to private equity were set to increase to 6.5 percent in 2010, from 4.9 percent in 2007, while real estate allocations were expected to rise to 5.8 percent from 5.1 percent over the same period.

Average allocations to infrastructure and other real assets such as farmland, timber and commodities, were also expected to increase, according to the study, from 1.7 percent in 2007 to 2.4 percent by 2010.

“Market dislocations have not dissuaded institutions from their program of using alternatives,” the report said, arguing that many investors were now seeing niche opportunities in alternatives and “adjusting their alternative asset strategies accordingly. What they are not doing in any substantial way is pulling back.”

The report said that of all the investors surveyed 62 percent were planning to increase their allocations to private equity compared to 46 percent for real estate. Around 10 percent of those questioned planned to decrease their allocations to real estate, compared with five percent for private equity. More than half of the respondents said they planned to increase their allocations to infrastructure and real assets.

Infrastructure was one area where investors were increasingly targeting, with the sector’s investor base expected to double by 2010. Just 13 percent of those questioned already invested in the asset class, however another 14 percent of respondents said they planned to make new allocations to infrastructure over the coming years. Around two-thirds of those questioned already invested in private equity and real estate.

Investors who participated in the study were also calling for more geographic diversity, particularly in real estate, with respondents saying they preferred non-US assets.

The growth of the alternatives industry though led some investors to fear an overcrowding of the space, according to the report, presenting a challenge to alternative fund managers: “Thus far the industry has proven itself up to the task [of meeting investor demand], with continuous innovation in nearly every aspect of alternative investing. Over the next several years, however, asset managers will likely have to redouble these efforts to meet or exceed clients’ performance expectations for both risk and return.”