London Business School Coller Institute of Private Equity

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THE COLLER INSTITUTE'S FIRST RESEARCH REPORT UNDER THE NEW ADVEQ APPLIED RESEARCH SERIES REVEALED

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THE EXTENT AND EVOLUTION OF PENSION FUNDS' PRIVATE EQUITY ALLOCATIONS

 London, UK, 22 January 2014: 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 and fellow of the Coller Institute 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.”

‘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.

To download a copy of the full research report, please Click Here

Please send any comments or suggestions you might have to collerpe@london.edu

PLEASE NOTE THAT THE FINDINGS WILL BE EXAMINED IN A WIDER CONTEXT AS PART OF THE AGENDA OF THE INSTITUTE'S SYMPOSIUM 2,3 JUNE 2013 IN LONDON. FOR MORE INFORMATION Click Here

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