survey shows eight out of 10 portfolios investing in private equity exceed trustee expectations
Some eight out of 10 pension schemes investing in private equity have reported returns that have met or exceeded trustees' expectations, according to JP Morgan Fleming's (JPMF) alternative investment strategies survey.
The survey covered 171 of the top 350 UK pension schemes representing £365bn in assets. It indicated 44% of the largest UK pension schemes now have exposure to private equity, with the overriding reason for investing being the potential for higher returns compared with conventional asset classes. The actual proportion of total pension fund assets invested in this asset class remains relatively small, averaging just 4.4% of pension fund assets, according to JPMF.
Nearly a quarter of those schemes surveyed currently invested in private equity made the decision to do so within the past two years.
Some 16% of the 171 schemes surveyed had invested in private equity in the past, but no longer do and 40% had never invested in this asset class.
With regard to schemes which had never invested in private equity, only 6% of those surveyed said they were likely to invest again in the future and 30% said they might look to the asset class once more. The group noted that of those likely to invest in the sector in the future, three-quarters said they would use an external fund of funds manager. Specialist mandates are the most popular investment method, with just 15% using in-house management.
Stephen Hobbis, client adviser at JPMF, said: 'For those considering making a commitment to alternative investments, a fund of funds approach is by far the most popular investment option, and this makes good sense in our view.' For exposure to other alternatives, JPMF found that hedge funds are gaining in popularity, although they remain behind private equity.
Hobbis said: 'Investment in private equity among the largest pension plans is fairly widespread and the vast majority of investors are happy with the returns generated. There has been a much lower take-up with hedge funds but interest does seem to be increasing.'
Only 8% of respondents invest in hedge funds, although 7% said they would definitely invest in the future and a further 36% have not ruled the possibility out. Of the pension funds considering investing in hedge funds in the future, 71% said they would use a fund of funds multi-strategy approach.
Low correlation with other asset classes was cited as the main reason for considering investing in hedge funds in the future, followed by potential for higher returns, although this was tempered by the perception of risk as the main reason for not investing in hedge funds in the future, Hobbis said.
He added: 'Interestingly, issues such as accounting standard FRS17 and the movement towards DC have not significantly deterred pension schemes from investing in alternative asset classes.'
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