Private equity becomes more popular

New research shows that professional investors are increasingly turning to alternative investments in an attempt to boost excess returns in their investment portfolios.

The report by Goldman Sachs and Frank Russell looks at the alternative investing done by public and corporate pension funds, and endowments and foundations in Australia, North America, Continental Europe, the United Kingdom, and Japan.

Since the first survey in 1992, the level of commitment to alternative investments has continued to grow across all regions and private equity is now included in many of the world's largest institutional portfolios.

Major findings of the survey include:

• In North America and Europe, alternative investment commitments increased substantially. Total assets committed to private equity increased 46% to more than US$246 billion this year. North American assets increased from US$152 billion to US$220 billion; while in the United Kingdom and Europe, where more institutions were surveyed in 2001 than in 1999, assets rose from US$14 billion to US$23 billion. Australian private equity assets rose slightly.
• Average strategic allocations to private equity continue to grow from 1999 levels in all regions, though the rate of increase has slowed in North America and Australia: 7.5% of total fund assets for North America (up from 7.3%), 3.6% for the UK and Continental Europe (up from 2.5%) and 6.5% for Australia (up from 6.3%).
• Further increases in strategic allocations to private equity are anticipated in all regions by 2003. In North America, the 2003 allocation is projected to move from 7.5% up to 8.1%. Australian respondents expect their allocation to private equity to grow from 6.5% to 7.2%.
• Leveraged Buyout Funds have attracted the largest share of private equity commitments in all regions except Japan, where venture capital funds are favoured by the small investor base.
• In regions other than Japan, hedge funds account for a modest share of alternative assets. North American and European commitments to hedge funds stand at US$12 billion and US$2 billion, respectively. Most respondents showed an interest in hedge funds, with a number indicating they were exploring the asset class and expected to invest in it in the next two years. However, the complexity of the asset class may be daunting to some investors. A number of respondents reported making small commitments to hedge funds for research purposes, even though they do not have a formal strategic allocation in place. As investors develop more familiarity with hedge funds, we expect that strategic allocations will rise.

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