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Shifting the focus
Shifting the focus
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Shifting the focus

31/05/2016

Daniel Engel

Daniel Engel

Global Head Private Equity and Debt Solutions

BNP Paribas Securities Services

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What the future holds for pension funds moving into private equity

Private equity is enjoying significant growth. PwC estimates that it could increase its assets from USD 3.6 trillion in 2013 up to USD 7.4 trillion by 2020. Pension funds, which traditionally invested into bonds and equities, are increasing their exposure to private equity and alternatives. eVestment predicts that pension funds will increase their alternative allocations from 15% of their portfolios to 19% in the next three years.

This is being driven by the performance of private equity relative to other asset classes. 64% of investors said in 2015 that their private equity portfolios had met expectations, while 30% acknowledged expectations had been exceeded, according to Preqin. The mood remains bullish with 95% of investors telling Preqin they anticipated their private equity portfolios would exceed public market returns over the coming year. Furthermore, a study by the S&P Dow Jones Indices found the majority of traditional European equity fund managers failed to beat their respective benchmarks over the preceding decade.

The priority for pension funds in this zero and negative interest rate environment is to deliver alpha if they are to meet their growing liabilities. The shift by pension funds towards private equity is also driven by their desire to have less correlation to the markets, and to attain risk diversification. The long lock-ins typical of private equity are also better tolerated by pension funds who take a long-term view on their portfolio investments.

Data management, ESG and co-investment are the areas of focus in the article first published in IPE magazine, May 2016 and on the IPE website.

 

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What are the underlying trends to this shift in focus?

  • ESG is gaining traction among clients
  • Co-investing and direct investing is a growing trend
  • Valuation must be independent and reported succinctly
  • Collecting data is difficult. Simplifying and harmo­nising the data for clients is even harder
  • The industry is moving towards standardisation of reporting, both in terms of content and format
  • Working with an established service provider to manage these changes will help private equity attract investors

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