Faced with an abundance of cheap capital and decreasing expected returns across virtually all asset classes, family offices and foundations continue to recognise the opportunities private equity offers.
The Private Equity International survey, conducted in partnership with Montana Capital Partners, reveals that a significant number of investors have increased their exposure to the industry in the last year and many plan to dedicate more capital to private equity in the coming year.
Chart 1 shows that 35 percent of respondents have an allocation to private equity in excess of 20 percent of total assets under management. A further 28 percent allocate more than 10 percent to the asset class.
Respondents were asked how this allocation had changed over the past 12 months. Half said that it had increased (see Chart 2), highlighting that family offices and foundations continue to have a high exposure to private equity. Only 11 percent answered that their allocation had decreased and the 1 percent with no allocation have plans to invest in private equity over the next 12 months.
Confidence in expected returns can be seen in Chart 3. In the coming year, 43 percent of respondents plan to increase their exposure to private equity. The equivalent figure in last year’s report was 36 percent, suggesting that the investor group is becoming more deeply committed to the industry in general. Only 6 percent answered that they would decrease their allocations.
Although the survey results suggest the investor group is committing more capital to private equity on the whole, opinion was split when respondents were asked whether they planned to change the number of managers they invest with.
Chart 4 shows that 33 percent of family offices and foundations increased the number of GP relationships they have in the past 12 months, whereas 27 percent answered that the opposite was true.
Despite this disparity, the results show that 64 percent felt the number of
relationships they share with GPs is now at an optimal level, suggesting that many investors have established long-term relationships with trusted managers.
One respondent explains why they have reduced the number of managers they invest with to an optimal level: “Principally, we were over-diversified before [and have] now reduced the number of active manager relationships down to 15-20 and that’s roughly the number of managers that we’ll keep going forward. So we expect to make commitments to no more than five managers per year.”
The long-term strategic preferences of family offices and foundations can be seen in Chart 5. When compared with last year’s results, one of the most notable changes is the rise of private debt; in line with sentiment in the wider investor landscape. Over half of those who responded to the survey this year classed private debt as one of their principal strategies. When the same question was asked in the previous survey, this figure stood at 31 percent.
Other changes in preference include a decline in interest in mid-market buyout strategies from 80 percent to 58 percent, despite a 60 percent response from the last survey that the strategy would be over-weight this year. Distressed and turnaround strategies have similarly fallen in popularity from 52 to 37 percent.
As with long-term strategic preferences, distressed and turnaround strategies have dropped down the table. Large buyouts continue to be the least popular strategy.
While not scoring as highly as the preferred strategy, secondaries tied with venture capital as second choice, behind real estate and mid-market buyout, indicating that family offices and foundations consider secondaries to be highly complementary for balancing their portfolios.
Chart 7 shows that the developed markets of Western Europe and North America were cited as the preferred regions to invest into. Asia-Pacific gathered a 59 percent response, in some part thanks to a large input from family offices and foundations based in the region. It also appears that the regions targeted by family offices and foundations are fixed for the near future, as responses to which regions will be overweight for next year follow the same trend as current geographic preferences (see Chart 8).