News & analysis
Pension funds are turning to private equity in search for yield
Pension funds globally increased their exposure to private equity by $9.13bn (£6.73) towards the end of 2019, as insti- tutional investors turned to illiquid asset classes in search of yield.
Growing demand was driven by funds in the
US, with Californian CalSTRS
accounting for $4.39bn (£3.33bn), which was almost half of all inflows in September 2019 alone, according to data analytics firm eVestment. The $241bn (£182.8bn) pension fund for teachers aims to invest 13% of its portfolio, or around $31bn (£23.5bn), in the asset class.
The trend is also catching on in the UK, where around a quarter of institutional investors are considering increasing their exposure to private equity, according to Aon’s Pensions Risk Survey. One example closer to home is the North- ern LGPS Pool, which has established a col- lective private equity investment vehicle –
the Northern Private Equity Pool – which as of March 2019 held $547.9m (£415.8m) in five private equity funds. It targeted invest- ing £720m in such funds in 2019. Similarly, Border to Coast secured £500m of private equity commitments from eight partner funds earlier in 2019, which it aims to fully allocate by March 2020. By the end of November 2019, only £140m of those funds had been invested.
This highlights one of the key challenges private investors are finding: growing levels of dry powder. According to eVestment, of the 103 public plans globally that had open allocations, some $38.8bn (£29.4bn) is yet to be committed. By mid-2019, the industry sat on a record $2.44trn (£1.82trn) of dry powder, according to alternatives data pro- vider Prequin.
It is easy to see why there has been such a spike in demand. Over the past 10 years, total returns from UK private equity was comfortably double those in the FTSE All
Share index, according to the British Pri- vate Equity & Venture Capital Association. But there are early warning signs that pri- vate equity returns may have peaked. Dominick Mondesir and Nalin Patel, pri- vate capital analysts at data firm Pitchbook, warn that this could become a problem. “Arguably the largest headwind within the European PE markets, alongside valua- tions, is whether the industry has enough capacity or available target companies to put the mounting levels of dry powder to work. With broadly stable debt-to-equity r atios, significant challenges are arising for GPs as they’re having to work harder to deploy capital given that proportionally less of a deal is financed from a fund’s equity.” Lisa Shalett, chief investment officer at Morgan Stanley Wealth, recently warned investors in a note that they might have to brace themselves for low double-digit returns. “The environment for private investing has gotten tougher” she warned.”
European appetite for equities returns but UK investors are bearish
Following months of persistent outflows, investors’ appetite for equities appeared to return towards the end of 2019, fund flow data suggests.
European equity funds reported some €4bn (£3.3bn) in net new inflows throughout September, a marked improvement from the €18bn (£15.1bn) of cash that was returned to investors a month earlier, according to the European Fund and Asset Management Association (Efama). But the change in demand varies signifi- cantly by sector. While global equities reported more than €4bn in inflows, almost €3bn (£2.5bn) left US equities throughout October, according to Lipper.
This trend is also tangible in the UK, where equity fund assets increased to just above £730,000 from around £660,000 in 12 months, according to the Investment Asso- ciation (IA), an 11% increase.
The slightly more bullish outlook for equi- ties follows three rate cuts by the Federal Reserve as well as a commitment by the ECB to cut rates and initiate another round of quantitative easing through September. The growing appetite for equities should be good news for the British fund industry, since equity funds account for more than half of all British fund assets. Indeed, some of the best-selling funds across Europe invest in UK equities, including the GBP denominated UBS ETF MSCI UK Ucits ETF and Vanguard’s FTSE 250 Ucits ETF, which is also GBP denominated, according to Lipper.
This suggests that some European inves- tors think that Brexit risks have been priced in. Moreover, the current low value of the pound might make investments in GBP- denominated funds relatively more attrac- tive for European investors and could also be an indirect bet on a rising pound.
8 | portfolio institutional | December-January 2020 | issue 89
Indeed, the pound has fallen to a 10-year low against the euro and US dollar in August but has since crept up, suggesting that investors are confident the UK would find a way out of the Brexit impasse. But IA data also shows that institutional investors in the UK appear significantly more bearish.
Throughout 2018, net fund sales to institu- tional investors dropped by almost £13,000 and this downward trend continued through 2019.
In the third quarter of 2019 alone, net fund sales to UK institutional investors fell by £6.2m.
On average, UK institutional investor holds only 20% of their portfolio in equi- ties, of which 6% are domestically listed shares. Some 59% of UK pension funds have reduced their UK equity exposure over the past 12 months, according to Aon’s Pen- sions Risk Survey.
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44
