State Street research reveals that nearly two thirds (59 per cent) of institutional investors globally are set to increase their allocation to private equity over the next five years.
However, a further 15 per cent of institutional investors said their exposure to private equity is likely to decline over the same period. The firm writes that private equity assets under management reached a new high of USD2.4 trillion in June 2015.
Alternatives are seen as key to boosting returns, with 46 per cent of asset owners planning to increase their exposure. However, if the private equity industry fails to respond to investor demand for greater transparency, nearly a third (28 per cent) of investors said they would reduce their allocation to the asset class.
Illiquidity was cited by 70 per cent of investors as the biggest obstacle to increasing levels of direct exposure to private equity funds. This was followed by lack of investment transparency (38 per cent), lack of in-house expertise (29 per cent) and regulation (24 per cent).
Almost three-quarters (70 per cent) of investors are demanding increased levels of transparency from private equity managers on the performance of the underlying assets in each portfolio. Nearly half (46 per cent) are looking for greater read-through on risk exposures, net asset values (32 per cent) and fund cash flows (23 per cent).
According to the State Street study, 83 per cent of respondents expect investor demand for more transparency on risk and performance data to increase and of these almost half (47 per cent) expect a significant rise.
“Both asset owners and asset managers require enhanced data and analytics solutions to demonstrate increased levels of transparency of underlying assets and risk exposures. It is very clear from our research that failure to provide sufficient levels of transparency increases the risk of driving asset owners away from investing in private equity,” says JR Lowry, head of State Street Global Exchange in Europe, Middle East & Africa (EMEA).
In September 2015, State Street announced the launch of the State Street Liquid Private Equity Investable Index, a new solution that provides public access to private equity sector exposures. The model is intended to be used as a liquid proxy for direct private equity investment and is the first in a series of investable indices that can be used by investors to inform their investment process.
Lowry adds: “Investors are acutely aware of the need to diversify their portfolios in the search for yield evidenced by the push into alternatives we are currently seeing. Some of these will prefer a liquid return stream similar to private equity that satisfies their asset allocation requirements without the traditional impediments of illiquidity, lack of investment transparency and large minimum investments.”
