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Asset Allocation

Private Equity Assets Reach $3 Trillion

Total assets under management held by private equity funds worldwide have reached a new milestone.

(July 30, 2012) — Worldwide private equity assets have hit the $3 trillion mark, according to Preqin.

Industry assets under management increased by 9% from December 2010 to December 2011, highlighting the sustained growth of the industry in spite of challenging wider economic conditions, the data firm said. The strongest period of growth of the private equity industry occurred between 2004 and 2007, when assets expanded by 136%, fueled by mega buyout funds, the firm noted.

“Private equity continues to be attractive to institutional investors that are willing to forgo liquidity in return for outperformance,” Bronwyn Williams, manager of performance data, said. “Despite the uncertainty and volatility that has prevailed in recent years, faith remains that private equity fund managers can still deliver these returns.”

Williams continued: “When examining the 10-year performance of the asset class it is clear that private equity can generate superior returns; however, our analysis also highlights the wide gulf between the performance of top and bottom quartile funds.”

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Consequently, Williams concluded that the key issue for investors remains identifying, researching, and selecting the best potential fund managers for their portfolios.

Furthermore, the latest figures from Preqin show the gap between top and bottom quartile private equity funds’ performance has increased over recent quarters. The firm noted that 36% of fund managers with a top quartile fund go on to manage a top quartile successor fund. A total of 36% of bottom quartile managers remain in that quartile with their next offering, while 56% underperform the median benchmark.

Last year, another study from the firm found that amid an environment of market turbulence, nearly 25% of investors believe private equity is more attractive.

“The global financial crisis undoubtedly prompted many limited partners to re-evaluate their private equity strategies,” commented Emma Dineen, Preqin’s manager of private equity investor data, at the time. “Many have become more cautious and selective when choosing fund managers to invest with. However, despite recent volatility in the wider financial markets, investors generally remain positive about the private equity asset class, and many believe that there are good investment opportunities ahead.”

Dineen said that while investor appetite is there, the “crowded fundraising market means that investors are well positioned to be selective about the funds they choose to commit to, so the challenge remains for fund managers to market their funds in the best possible way and to ensure that they target the right investors if they are to enjoy success in this competitive market.”

Home > News > Risk > More Rate Pain Due for Investors?
Risk

More Rate Pain Due for Investors?

Recessions are rife in the developed world, but will the efforts to kick-start growth spell more pain for investors with liabilities?

(July 30, 2012) — More pain through low interest rates could be on the way for European investors as central banks mull options to relieve the economic crisis.

The Bank of England’s Monetary Policy Committee is set to discuss reducing the already record low rate of 0.5% in its meeting this week, Press Association reported over the weekend.

The report follows calls from the British Chambers of Commerce (BCC) and accountant and consultants Ernst & Young to help businesses across the United Kingdom grow by forcing down repayment rates on loans.

At the start of this month, the European Central Bank lowered the rates that would be applied across the Eurozone from 1% to 0.75%. With increasing pressure coming from a bailout  for Spain and a “negative” outlook by Moody’s for previously strong nations such as Germany and the Netherlands, this may be in line for further downwards movement.

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Almost two thirds of institutional investors, responding to a survey by Allianz Global Investors, cited falling interest rates as a major risk.

Falling rates troubled twice as many institutions as rising rates, the survey found.

“The longer rates remain extraordinarily low, the more investors become restless that there is insufficient economic growth,” the survey said. “Holding secure bonds thus turns into a frustrating waiting game.”

Some Eurozone countries have already seen the yields on sovereign-issued debt fall into negative territory – meaning the investor pays the borrower to lend them money – due to the perceived “safe haven” status bestowed on their finances.

“Current interest rates remain a huge risk for one in five institutional investors and a considerable risk for almost 45% of the rest,” the survey continued. “They are a reminder that survey participants are not only worried about loss of capital from sovereign risk but also miserly yields. Countries with extremely low yielding sovereign debt and a traditionally high portion of fixed income in their asset allocation such as Germany and Austria are the most worried about current rates.”

Another worry for pension funds is that lower interest rates usually translate into higher liabilities, due to the discounting factor applied to the figure issued by the central bank.

Pension funds in the Netherlands have already riled against falling rates against which to discount their liabilities, while in elsewhere in Europe governments have allowed pension funds to use more realistic rates to measure future benefit payments.

The survey found the Netherlands were the most wary of falling rates: 78% of participants said they were a considerable risk, versus the 45% European average.

For the full survey, click here.

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