Pension Funds’ Appetite for Private Equity Grows

Asset class is top choice for US, UK public pensions in Q3

US and UK public pension plans’ appetite for private equity continues to grow, with 233 new allocation commitments in the third quarter, making the asset class the top choice for new allocations among public pensions, according to data and analytics firm eVestment.

“The continued interest in private equity investment among public pensions over the past two years, and the recent surge in real estate investment among these pensions shows a trend of pensions continuing to explore alternatives as they look for yield at appropriate risk levels,” John Molesphini, eVestment’s global head of strategic engagement, said in a release.

It is the third straight quarter that private equity investments were the main focus for public pension funds in the US and UK, with allocations of 210 and 294 during the first and second quarters, respectively. Equity strategy investments held the No.  2 spot during the third quarter with 193 allocations among the public pensions tracked.

According to eVestment, pension commitments to equity strategy investments have been consistently strong throughout 2018 and 2017, with triple-digit commitments during each quarter tracked.

The firm said direct real estate investments allocations have also picked up during the second half of the year, with public pensions making 167 and 133 investments in real estate during the second and third quarters, respectively, compared to only 96 direct real estate investments during the first quarter of the year.

eVestment also noted that public pensions’ increased interest in private markets and other alternative investments means there is the higher level of transparency required for public pensions, which may be a new challenge for many of the fund managers.

“Because public pensions have a variety of stakeholders they are accountable to when making investments,” said Molesphini, “private markets and other alternative managers who seek to win public plan assets will need to comply with their transparency standards.”

And according to a September survey from data and intelligence provider Preqin, 57% of institutional investors allocate to private equity, which is the second-highest proportion of any alternative asset class after real estate. The survey found that 90% of investors said that private equity performance over the past 12 months met or exceeded expectations, including 19% who found that performance had exceeded expectations. However, the survey also found that investors are seeking an average of 11.6% from private equity investments, down from 14.1% in June 2015.

“With the vast majority (90%) of these investors finding that private equity performance has met or exceeded expectations over the past 12 months,” said Preqin, “it’s no surprise that 86% plan to maintain or increase their investments in the asset class in the coming year.”





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