Endowments and foundations continue to see private equity an important part of their allocation strategy, according to a new study by NEPC, but valuations are a concern for over half (58 per cent) of those questioned inn the Q3 2015 NEPC Endowment and Foundation Poll.
This survey, which as with the 2014 survey, focused on how endowments and foundations invest in and view private equity, found that year over year, endowments and foundations continue to show the importance of an allocation to private equity, with 37 per cent of respondents allocating over 10 per cent. When asked about return projections for their private equity investments, only 15 per cent of respondents expect higher returns, while 48 per cent noted lower returns, and 37 per cent said they expect results in line with previous returns.
“Compared to last year’s survey, allocations to private equity continue to be a significant investment consideration for endowments and foundations,” says Kristin Reynolds, Partner on NEPC’s Endowment and Foundation Practices Group. “What has changed from last year is the degree of concern expressed by respondents about key elements of private equity investing, specifically valuations and access. Potentially in response to these concerns, co-investing appears to be of growing interest as endowments and foundations look for strategies that come with the potential for higher returns, lower fees and offer them greater control over their underlying investments.”
When asked what strategies they are considering for the future, the majority of respondents are still looking at growth oriented and opportunistic strategies. Growth Equity, Venture and Buyouts are at the top of investor lists, however, these areas have decreased modestly since the 2014 survey. Conversely, more focus is being given to distressed investments and energy related strategies.
“Given a subdued growth outlook, investors are seeking investments that can play on the current dislocations in the market, such as energy,” says Reynolds.
As well as the question of valuations, other notable concerns about private equity investing include limited access to top funds (40 per cent), fund terms and fees (34 per cent), fundraising overhang (30 per cent) and fund sizes (20 per cent).
On the question of fees, respondents were divided when asked if they believe General Partners are properly disclosing fee arrangements. Nearly half of respondents said they did not believe fees were being properly disclosed, while 32 per cent believed they were. Notably, 23 per cent answered “not sure,” to the same fee question.
With increased difficulty in finding opportunities, co-investing has been seen by LPs as a way to access good deals with strong GPs, drive down fees, and exercise more control over underlying investments, yet fully 77 per cent of respondents in this year’s survey indicated they’re not currently employing this strategy. When asked if they’re considering co-investing, 49 per cent said “no,” 39 per cent said “no, but considering for the future,” and just 12 per cent said “yes.”
