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German institutional investors to increase private equity allocation

German institutional investors are planning to almost double their private equity allocations, according to a study carried out at the Fachochscule Wiesbaden in conjunction with Swiss fund of funds Adveq.

German insurance companies and pension funds are forecasting an increase in their private equity allocation from 1.2 per cent to 2.2 per cent. The projected rise follows reported average yearly private equity returns of 12.5 per cent. This falls well short of historical highs in the private equity industry, but it compares favourably with struggling public markets.

‘Institutional investors are shifting their focus to private equity because they expect attractive returns, higher certainly than with public equities,' said Peter Laib, managing director of Adveq.

‘German insurers and pension funds have return requirements of at least five to seven per cent in the long term. With public markets performing so badly there is no way they can reach those levels of returns through traditional asset classes,' Laib continued.

The survey also predicts that institutional investors will reduce their commitment to direct investments in favour of private equity funds.

‘It is not the core business of insurance companies and pension funds to invest directly in companies and the results have been very disappointing,' said Laib. ‘Now, with the crisis in public markets, institutional investors are being forced to stick to what they know best and are increasingly hiring external specialists such as fund managers and fund of fund managers.'

A similar study was carried by Golding Capital Partners in January 2002, which suggested that German institutional investors would increase their allocation to private equity from one per cent to over four per cent in the next five years.

At that time pension companies and insurers predicted that troubled public markets would only have a negative effect on private equity in the short to medium term.

Looking ahead to the future of the Germany's private equity industry, Laib pointed to the country's declining venture capital industry. ‘There is still some paralysis in the venture market,' he commented. ‘There is a reluctance to take the risk to set up new companies.'

But Laib is reluctant to be overly pessimistic about the state of the German market and is looking to the US for signs of hope for Europe's private equity industry.

‘There has been considerable consolidation in the US private equity market and high quality fund mangers are beginning to invest again. Europe is traditionally six to nine months behind America so we expect to see some signs of improvement soon,' he said.

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