Endowments Turn Skeptical Eye on Private Equity

The honeymoon may be over for endowments and foundations’ long love affair with private equity.

Nearly 75% of asset owner respondents to an NEPC survey anticipated allocating at or above their targets, but had mounting concerns about the asset class.

“Endowments and foundations (E&F) in the US continue to access private equity as a meaningful component of their investment portfolios,” said Cathy Konicki, NEPC partner and head of the E&F practice group.

“However,” she continued, ”recent investor activity in private equity indicates endowments and foundations have increasing concerns regarding prospective returns, current valuations, and access to top funds.”

 Source: NEPC

Respondents cited valuations as their top worry about the asset class, in which 97% of them invest. Competition for limited partner (LP) slots with high-profile managers came second, with 23% of investors calling it their biggest concern.  

Limited access may be more of a perceived issue than a real obstacle for investors: Nearly 70% invested as much as desired with every fund they approached this year. Furthermore, four out of five asset owners have not translated any concerns about LP competition into altered investment review or approval processes.

Private equity lifted endowment returns in the last fiscal year, according to a preliminary NACUBO-Commonfund study. The asset class returned 17% on average, net of fees, while alternatives more broadly gained 12.8%. Despite private equity’s contribution, endowments’ unlisted bucket brought down their 15.8% average overall returns.

The vast majority of the investors NEPC polled don’t anticipate private equity returns to go much higher than they have already. Nearly half (48%) predicted performance in line with historical results, while 42% thought the best times are already in the rearview mirror.

The Boston-based consultancy’s E&F group, which serves 106 funds on retainer, circulated the online survey last month.