Pension funds globally increased their exposure to private equity by $9.13bn (£6.73) towards the end of 2019, as institutional investors turned to illiquid asset classes in search of yield.
Growing demand was driven by funds in the US, with Californian CalSTRS accounting for $4.39bn (£3.33bn), which was almost half of all inflows in September 2019 alone, according to data analytics firm eVestment. The $241bn (£182.8bn) pension fund for teachers aims to invest 13% of its portfolio, or around $31bn (£23.5bn), in the asset class.
The trend is also catching on in the UK, where around a quarter of institutional investors are considering increasing their exposure to private equity, according to Aon’s Pensions Risk Survey.
One example closer to home is the Northern LGPS Pool, which has established a collective private equity investment vehicle – the Northern Private Equity Pool – which as of March 2019 held $547.9m (£415.8m) in five private equity funds. It targeted investing £720m in such funds in 2019.
Similarly, Border to Coast secured £500m of private equity commitments from eight partner funds earlier in 2019, which it aims to fully allocate by March 2020. By the end of November 2019, only £140m of those funds had been invested.
This highlights one of the key challenges private investors are finding: growing levels of dry powder. According to eVestment, of the 103 public plans globally that had open allocations, some $38.8bn (£29.4bn) is yet to be committed. By mid-2019, the industry sat on a record $2.44trn (£1.82trn) of dry powder, according to alternatives data provider Prequin.
Dominick Mondesir and Nalin Patel, private capital analysts at data firm Pitchbook, warn that this could become a problem. “Arguably the largest headwind within the European PE markets, alongside valuations, is whether the industry has enough capacity or available target companies to put the mounting levels of dry powder to work. With broadly stable debt-to-equity ratios, significant challenges are arising for GPs as they’re having to work harder to deploy capital given that proportionally less of a deal is financed from a fund’s equity.”
Lisa Shalett, chief investment officer at Morgan Stanley Wealth, recently warned investors in a note that they might have to brace themselves for low double-digit returns. “The environment for private investing has gotten tougher” she warned.”