Pension funds are not allocating as much capital to private equity as they should, according to a study of 1,208 US and UK pension funds by the London Business School’s Coller Institute and private equity investor Adveq. The new research represents the first empirical, academic analysis of pension funds’ private equity allocations based upon their annual report data.
Pension funds are not allocating as much capital to private equity as they should, according to a study of 1,208 US and UK pension funds by the London Business School’s Coller Institute and Adveq, the globally active private equity investor.
The new research represents the first empirical, academic analysis of pension funds’ private equity allocations based upon their annual report data. The data shows that while schemes’ allocations to the asset class have grown significantly, they are still lagging behind other sophisticated investors.
From 2005 to 2012 public pension funds’ allocations to private equity have increased, on average, from 4.5% to 5.64%, while allocations from private pension funds have increased, on average, from 4.99% to 5.33%.
The more seasoned public funds nearly doubled their percentage capital allocations to private equity between 2007 and 2012.
Coupled with increases in assets under management, higher allocations to private equity have resulted in an extra $350bn from public pension funds and $240bn from private pension funds being pumped into the private equity industry. The increases coincided with a decline in schemes’ exposure to public equities.
Despite this, pension fund allocations to private equity still remain significantly lower than those of family offices/endowments and sovereign wealth funds, which stand at around 10% and 18% of their assets under management respectively.
Florin Vasvari, Associate Professor of Accounting, London Business School, said:
“Pension funds have traditionally been big supporters of private equity investing, but they are still lagging behind other sophisticated investor groups. Pension funds are well equipped to change this and further increase their allocations to the asset class, as it is a good match for their long time horizon and predictable liabilities.
“The typical annualised outperformance that the private equity asset class offers relative to public market equivalents could contribute to lower pension fund deficits.”
The new research also highlights that pension funds remain significant allocators to private equity funds of funds, with 80% of smaller funds and 60% of medium and large-sized schemes using such vehicles in some part of their private equity portfolio.
Sven Lidén, Managing Director and CEO at Adveq, said:
“The big question for pension funds allocating to private equity is what methods of investing best capture the outperformance the asset class can offer, as the dispersion of returns is significant. To get past this challenge, schemes tend to use a combination of access points from investing in companies directly, co-investing alongside expert fund managers, through to committing capital to single-manager funds and funds of funds.
“It is no surprise then that pension schemes of all sizes still back private equity funds of funds. For the smaller pensions they provide a practical way of identifying and investing in the top performing fund managers, while for the larger players, such vehicles provide a way of accessing small funds and or getting exposure to niche strategies/geographies.”
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Notes to editors
About ‘The Extent and Evolution of Pension Funds’ Private Equity Allocations’
‘The Extent and Evolution of Pension Funds’ Private Equity Allocations’ was co-authored by Eli Talmor and Florin Vasvari at London Business School’s Coller Institute of Private Equity, supported by Adveq, the globally active private markets investor.
The findings were based upon time series data of pension funds’ allocations into private equity from annual reports and augmented allocation data provided by Preqin.
The Coller Institute of Private Equity has as its primary focus the establishment of a world-renowned research centre and debating forum on private equity.
To download a copy of the full research report, please visit: www.collerinstitute.com
About London Business School
London Business School’s vision is to have a profound impact on the way the world does business. The School (www.london.edu) is consistently ranked among the best in the world for its programmes. It was ranked number one internationally for the full-time MBA programme*.
The School’s faculty, from over 30 countries, is grouped into seven subject areas – Accounting; Economics; Finance; Management Science and Operations; Marketing; Organisational Behaviour; and Strategy and Entrepreneurship.
The award-winning** Executive Education team offers a portfolio of over 25 open programmes as well as custom-designed programmes developed to meet the specific needs of individuals and their organisation. Annually, over 9,000 participants attend executive programmes that are led by many of the world’s leading business thinkers.
* 2013 Forbes international MBA ranking, 2012 Bloomberg BusinessWeek international MBA ranking and Financial TimesMBA 2009, 2010 and 2011 rankings
**London Business School was recently awarded the 2013 EFMD Excellence in Practice Award for its 10-year partnership with Danone.
Founded in 1997, Adveq is a leading asset manager investing in private equity and real asset funds globally. It offers specialized investment solutions which allow the firm’s clients to access select private market segments globally. To date, Adveq has invested in more than 400 funds on behalf of its clients and generated consistent returns throughout economic cycles. Adveq’s client base comprises institutional investors such as pension funds, insurance companies, family offices and other financial institutions located in Europe, North America and the Asia-Pacific region. Many of Adveq’s investors are repeat, long-term clients with whom the firm has developed a role as a trusted partner for private market investing. Adveq has offices in Zurich, Frankfurt, New York, Beijing, Shanghai, Hong Kong and London as well as a representative office in Sydney.