bfinance Highlights Investor Concerns Over Private Equity Mismatch

(December 19, 2011) — Some institutional investors in private equity have expressed concerns about a mismatch with return from the sector.

According to a study by consulting firm bfinance, some investors have lowered their allocation to private equity due to concerns over a mismatch between target net internal rates of return (IRRs) and realized net-of-fee returns.

The result: a significant amount of capital remaining uninvested, high competition for transactions, and extended holding periods driven by lack of financing and liquidity constraints.

Commenting on the survey’s findings, Emmanuel Léchère, Head of Market Intelligence Group at bfinance, said: “Clearly private equity has a major role to play in enhancing overall returns but to align actual returns with future expectations, more institutional investors need to adopt a dynamic rather than an opportunistic approach to portfolio management that emphasizes stringent management selection, monitoring and negotiation in order to maximize the potential of investments in this asset class.”

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Nevertheless, the majority of the 41 institutional investors surveyed revealed that some strategies – such as private debt – still offer a better risk adjusted return. Institutions considered expected returns from private debt investments as the most closely aligned with actual returns. In contrast, investors’ sentiment on venture capital showed the largest difference between expectations and past experience with 87% of all investors expecting over 10% net IRR and only 44% of such investors having achieved 10% or above net IRR from prior venture capital investments.

Lorenzo Rossi, Managing Director, Private Markets, bfinance added:

“This survey underscores the fact that investors should actively invest in private equity rather than simply allocating to it. Average returns in the asset class often do not justify the illiquidity and too often realized returns net of all fees fall short of expectations. Therefore Investors need to focus on selecting the right managers that can create superior absolute returns. Amongst these, investors should seek out those that are correctly aligned to extract value for investors rather than for themselves.”

Pension money is going into hedge funds at a faster rate than other asset classes, according to an annual survey by the National Association of Pension Funds.

(December 19, 2011) — Pension funds in the United Kingdom are flocking to hedge funds, funneling money into the sector at a faster rate than other asset classes.

The findings come from an annual survey by the National Association of Pension Funds, which found that the allocation to hedge funds has risen from 2.6% to 4.1% over the last year.

Following hedge funds, emerging market equities also experienced large gains, rising from 2.5% to 3.6%. Real estate increased from 5.4% to 7.2%. Private equity went up from 3% to 3.8% and infrastructure improved from 0.8% to 1.1%.

The findings by NAPF follow another study published by research firm Preqin in November that showed that 38% of institutional investors surveyed aim to increase their exposure to hedge fund investments in 2012. The firm noted that although institutional confidence has waned as a result of poor returns toward the end of this year, the outlook for next year remains positive. “Hedge fund managers can expect a large influx of capital from institutional sources over the next 12 months, and assets could potentially reach the pre-crisis watermark of $2.6 trillion…While we expect demand for further liquidity and transparency to continue, with increasing numbers of investors opting for separately managed accounts, traditional fund structures are likely to remain at the forefront of investment portfolios,” Preqin stated in a release.

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Another report released in November by Hedge Fund Research (HFR) showed that within the hedge fund universe, equity hedge leads the industry while macro funds decline. “Hedge funds posted gains for October concentrated in Equity Hedge and Event Driven strategies, as managers adjusted exposures intra-month in response to rapidly improving condition across equity and credit markets,” said Kenneth J. Heinz, President of HFR, in a statement. “The primary focus for managers, as well as the primary catalyst for financial markets, continues to be the European sovereign debt crisis, with the outlook having improved despite the continued likelihood of volatility and unpredictable political developments. In the current environment, fund managers are looking to maintain tactical flexibility to opportunistically adjust exposure to dynamic market conditions, while maintaining core exposures to constructive portfolio themes across equity, credit, commodity and currency markets.”

According to HFR, while equity hedge strategies had the largest positive contribution to index performance in the month, event-driven funds also posted gains on improved equity markets. On the other hand, macro funds posted declines on trend reversals, despite positive contributions from commodity exposures and discretionary managers.