Study: LPs to increase exposure to PE, VC(2)

As LP concerns with portfolio liquidity fall, willingness to invest in illiquid strategies like private equity and venture capital has grown.

Despite reports of a growing number of limited partners reaching the cap of their allocations to private equity and venture capital, a recent Commonfund survey has found that many investors are seeking to increase exposure to those strategies. 

The survey, which includes responses from 217 investors representing institutions with an aggregate $123 billion in assets, found that 47 percent of respondents expect to increase their exposure to private equity and venture capital strategies over the next 12 to 18 months, compared to just 40 percent the previous year. Only 11 percent of respondents said they expect to reduce their exposure to the strategies, while 42 percent indicated they would maintain their current level of exposure. In 2012, 13 percent said they would reduce and 47 percent said they would maintain. 

Investor willingness to increase exposure to illiquid, long-term private equity and venture capital strategies may be due to declining portfolio liquidity concerns, Commonfund managing director Keith Luke told Private Equity International. 

“The number of LPs who are concerned about portfolio liquidity has gone down,” he said. “If you’re a pension fund that is fully or close to fully funded, or a private foundation [that] can take more illiquidity, or an endowment … those institutions are willing to take more illiquidity risk because they’re very concerned about meeting their obligations in public markets alone.”

Within private equity, Luke said anecdotal evidence pointed towards growing LP demand for mid-market or niche strategies that place a greater emphasis on operational transformation of portfolio companies. 

“I do think most investors are a little bit more concerned about the large end of the LBO. Obviously, there’s a lot [of capital] going in there,” he said. “But most institutional investors … think there’s greater opportunity in the middle market.”

Earlier this week, a Bain & Company private equity report indicated that many LPs may struggle with their private equity commitments over the next year, as many remain tied up in large commitments to pre-2008 vintages that have struggled to deliver exits amid limited opportunities for IPOs.

Commonfund is an alternative investment firm that services non-profit institutions, pension funds and other institutional investors. The firm and its subsidiaries manage approximately $25 billion.