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Endowments are Over-allocated to Private Equity

29 October, 2009
In recent months, several reports have suggested that many endowments are being forced to sell their interests on the secondary market as a result of being above their target allocations to private equity.  74% of respondents are either at or below their target allocation to private equity, with just over a quarter stating that they are above their target.
 
A large proportion of the endowments that reported being above their target allocations to private equity have total assets in excess of $500 million, which would suggest that it is the larger, more high-profile funds, which tend to employ significant over-commitment strategies, that are most affected.42% of endowments with assets under management of $750 million or more reported that they are above their target allocation to private equity.
 
Change of Plans
 57% of respondents have altered their private equity strategies in some manner as a result of the financial crisis, with 9% postponing investment in the asset class altogether for the next year.
Of the endowments still actively investing in the asset class, a number cited multiple changes in their approach to investing in the asset class. 35% are reducing the rate of commitments they make to private equity and 22% are exercising greater caution, stating that they will be conducting more stringent due diligence on new investments. 
 
One endowment explained that “there are opportunities to be had but because of
the nature of the market, we have to tread carefully.” 43% of respondents stated that their plans for private equity have remained unchanged. One endowment was of the opinion that “the market is at a stage where it is ideal to invest. Historically, good opportunities exist when investments are made in funds raised at the bottom of a cycle. They can give very good returns.” A sentiment shared by the 1% of respondents that stated the downturn has led them to view the private equity asset class more favourably.
 
Areas of Focus
Looking at the geographic preferences of the endowments that participated in the survey, we found that North America is the most preferred region for investment. 93% of endowments have previously invested there and are still looking to invest in the region and a further 1% that have never invested in the region but are looking to do so in the future. 83% of respondents are looking
to invest in Europe focused private equity funds in the future, and 81% are planning to invest in Asia and Rest of World focused funds. These figures show that most endowments now invest on a global scale.
 
Next Commitments
Nearly two-thirds of respondents stated that they will be investing in private equity before the end of next year, with 26% looking to invest before the end of 2009 and 38% planning to invest in 2010. One New York-based endowment stated that “the next 6 – 18 months will be a great
time to invest, as credit is starting to come back into the market, making investments in the asset class more appealing.” 6% of respondents were undecided as to when they would make their next commitment to private equity, with many investors waiting to see when the market will improve.
A further 7% stated that they were unlikely to invest in the asset class in the next two years; one European endowment reasoned that the private equity market was “currently overcrowded and full of problems”.
 
New Relationships
Of the endowments that plan on investing in the asset class within the next 12 months, 51% stated that they would consider investing with general partners that they have never invested
with in the past. Some endowments are using the current state of the market to their advantage and believe that now is the time to invest with new managers and push for more favourable terms.
 
One Georgia-based endowment stated that “there needs to be an alignment of interest between general partners and limited partners, especially when negotiating the terms of contracts.” The remaining 49% of endowments stated that they would be looking to invest only with managers that they have previously invested with.

Performance Expectations
As expected, the majority of endowments (97%) expect the performance of their private equity investments to be better than that of the public markets. 52% expect their returns to be more than four percentage points higher than those of the public markets. One endowment stated that “capitalisations will stabilise, and private equity still offers a better return than the public market.”
 

 

From Preqin’s research report “Survey of Endowments Investing in Private Equity”

 


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Endowments are Over-allocated to Private Equity

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