Despite charging investors higher fees, private equities continue to enjoy an overwhelmingly favorable opinion among institutional investors.
According to a survey conducted by market research firm Preqin, 71 percent of institutional investors expressed satisfaction with the returns on private equity investments. The survey in which over 100 investors were interviewed found that almost all of them (99 percent) expect private equities to outperform public markets.
The investors’ willingness to pay higher fees for private equity funds can be seen by the expectation among 65 percent of the pension, foundation and endowment funds that private equity allocations will beat public market returns by at least 400 basis points.
Investors Cautious and Remain Defensive
The survey also found that despite the positive bias towards private equities, investors remain cautious near term. Among those surveyed, only 23 percent expect to put money in first time private equity funds in the next twelve months. The current uncertainty in the wider financial markets is having a significant impact on the investors’ confidence and the survey found that among North America based investors, 90 percent are either at or below their internal target allocations to private equity.
The survey also found that 19 percent of investors expect to increase their exposure to private equity over the next 12 months.
Private Equity Growth Driven by Pension Funds
Despite concerns about the ongoing problems in the Eurozone, and the weakness in the US job market, data compiled by research firm Preqin shows that aggregate capital raised by private equity funds was slightly higher in the first half of 2012 compared to the second half of 2011.
Craig Baker, global head of research at Towers Watson Investment, says that this growth in private equity capital despite weak economic conditions is a result of increased inflow from pension funds needing to find investments that pay more than bonds but without the short term implications of equities. Baker says allocations by pension fund managers to alternative assets now account for 20 percent of pension fund assets, up from just 5 percent fifteen years ago.
Private Equity Job Market Likely to Remain Lackluster
It is clear that private equities enjoy very favorable view among institutional investors. However, market confidence among institutional investors is very low and as a result, several institutional investors have allocated lower than their intended target to private equity.
This, along with the data that the first half aggregate capital raise by private equity is only slightly better than the capital raised in the second half of last year, the private equity job market in the near-term is unlikely to see meaningful improvement.
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