PE allocations on the up

Research into 110 European institutional investors suggests that their private equity allocations will pass the E100bn mark over the next five years.

Leaner times in private equity have done little to dissuade investors from stepping up their commitment to the asset class, according to research published by AltAssets.

The Limited Partner Perspective Report assesses the current market environment based on the views of 110 institutional investors in Europe. It reports that 42 per cent of those surveyed intend to increase their allocation to private equity over the next five years against two per cent planning to reduce it.

The survey also suggests that a majority of European investors (67 per cent) predict that over the same period of time their strategic allocations to private equity will exceed 3 per cent of total assets. The research thus forecasts growth of private equity as an asset class at a slower rate than predictions published in the Goldman Sachs and Frank Russell Alternative Investing 2001 Report last December, which forecast European private equity allocations to exceed four per cent by 2003.

European institutional investors have allocated more than E89bn to private equity and are expected to pass the E100bn mark by 2007, AltAssets say. The survey also highlights renewed interest in Germany investments, with 57 per cent of respondents citing it as the key market. The German market as target location of choice was closely followed by Spain, Scandinavia, France and the UK.

'It was only to be expected that institutions would feel a bit bruised after the experience of the last couple of years. But it doesn't seem to have put them off and they are still convinced private equity can deliver them superior returns over the long-term,' said Chris Davison, head of research at AltAssets. Most institutions expect an improvement in their returns over the next five years with 83 per cent of respondents saying they expected annualised returns on their buyout investments in excess of 11 per cent over the next five years.

With regards the problems facing institutional investors in private equity, two-thirds of those surveyed cited a lack of transparency, particularly in terms of the lack of standardised and comparable data, as the biggest obstacle to investing in private equity. However, the high fees charged by private equity groups did not concern worried investors as much as expected. The main concerns centred on management fees, which were often seen as excessive for large funds.