Insurance Cos. Still Expect PE Returns to Beat Public Markets

Despite the higher risk involved with investments in private equity, insurance companies plan to maintain or increase their investment allocations to the asset class, according to a survey conducted by Preqin. The majority of respondents expected to maintain their allocation to the asset class during the next year, with just over a quarter intending to increase their exposure.

Just under half of the insurance companies surveyed-42%-said they believe they’ll increase their target allocation in the long-term. “Should such expectations be fulfilled, the average target allocation of insurance companies is likely to move towards those of other institutional investor types, which typically exceed 5%,” according to the report. If that’s the case, buyout shops will be spending quite a bit more time knocking on the doors of insurers.

The increased allocation to buyout funds from insurance companies may be driven by the fact that insurance companies continue to expect private equity to outperform the public markets. A total of 85% of the surveys respondents expect their private equity portfolio to outperform the public market by more than 2%, with 51% expecting private equity to outperform the public market by more than 4.1%.

Those factors suggest that the financial crisis and economic downturn has caused insurance companies to raise their expectations of the asset class, according to Preqin.

One factor holding the insurance companies back, of course, is increased regulation. Since the onset of the financial crisis one year ago, regulations regarding the level of risk for investments have been discussed. “The investments of insurance companies in particular have been affected, with further restrictions on the exposure to risk planned in various jurisdictions,” the report stated.

You can read the rest of the report, which takes an in-depth look at employment in private equity, issues surrounding benchmarking performance, and dry powder, below.

Preqin Private Equity Report September 202009