Endowments, corpus of funds raised by non-profit entities and a big source of capital for the private equity industry, are continuing to show strong support for emerging markets.
A survey of 100 global endowments, conducted by London-based PE fund-raising tracker Preqin, reveals that a majority 70% are keen to continue investing in emerging markets and a further 11% were looking to make their maiden investments in these regions.
The worrying part, however, is that a significant number of endowments felt they are over-allocated to private equity. About 27% of all respondents are above their target allocations to private equity, with this figure rising to 42% for the largest endowments with over $750mn in assets under management. Only 33% of endowments have made one or more new commitments to private equity funds so far in 2009.
Endowments have an average target allocation of 11.8% to the asset class. This is above the average allocation for all types of institutional investors, which stands at 8.8%.
On investing in the asset class in the future in a changed global environment, the report said, almost a third (32%) of endowments expect to increase their exposure to private equity over the next three to five years but 14% anticipate reduction in allocations to the asset class during this timeframe.
“With an average current allocation to private equity of 10.9% of total assets and an average long-term target allocation of 11.4%, endowments are still important contributors of capital to the private equity industry, and over the next 18 months, we can expect around two-thirds of endowments to return to the private equity market, making fresh commitments to funds. However, we have also seen that around a third of endowments are still cautious about the asset class in the current climate and do not expect to make any new investments until at least 2011,” said Helen Kenyon – Manager, Investor Data in a statement issued by Preqin.
While there is a cautious approach from this prominent investor base to the asset class, the investors have been loud in making their terms clear on their relationship with GPs (general partners or investment managers to the fund). The report quoted one New York-based endowment as saying, “the next six to 18 months will be a great time to invest as credit is starting to come back into the market, making investment in the asset class more appealing.”
It is certainly a difficult fund-raising environment with most Indian fund managers finding it difficult to raise capital. Add to this the cautious approach of the investor base pressing for more favourable terms with GPs, the outlook for PE fund-raising looks bleak.
The report added that 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. The report quoted one Georgia-based endowment as saying, “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.
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