Nearly two thirds (59 percent) of institutional investors globally are set to increase their allocation to private equity over the next five years, according to new State Street research.1 In contrast, a further 15 percent of institutional investors said their exposure to private equity is likely to decline over the same period.
Private equity assets under management reached a new high of $2.4 trillion in June 2015.2 Alternatives are seen as key to boosting returns, with 46 percent of asset owners planning to increase their exposure.3 However, if the private equity industry fails to respond to investor demand for greater transparency, nearly a third (28 percent) of investors said they would reduce their allocation to the asset class.
Illiquidity was cited by 70 percent 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 percent), lack of in-house expertise (29 percent) and regulation (24 percent).
Almost three-quarters (70 percent) 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 percent) are looking for greater read-through on risk exposures, net asset values (32 percent) and fund cash flows (23 percent).
According to the State Street study, 83 percent of respondents expect investor demand for more transparency on risk and performance data to increase and of these almost half (47 percent) 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,” said 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 added, “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.”
“Through understanding these challenges, State Street is able to develop innovative products designed to reduce barriers to entry for asset owners looking to invest in this growing asset class.”