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Investors to up private equity allocation despite lower return expectations, survey says

Institutional investors in Europe and the US intend to increase their average strategic allocation to alternative assets such as private equity, hedge funds and real estate, despite predicting a further decline in returns, according to the 2003 Goldman Sachs and Russell Global Report on Alternative Investing by Institutions.

The US average allocation to private equity remained constant from 2001 to 2003 at 7.5 per cent. This figure is expected to increase to 8.2 per cent by 2005. European allocations have increased from 3.4 per cent in 2001 to 4.2 per cent in 2003, and are expected to climb to 4.8 per cent over the next two years.

But this increased allocation to private equity is being made despite predictions of a further decrease in returns. Global three-year return forecasts fell from 15 to 20 per cent in 2001, to ten to 12 per cent in 2003.

The report's authors attribute investors continued commitment to the asset class to the need to generate absolute returns and achieve diversification in volatile economic conditions.

The report also said that funds of funds had become an increasingly popular investment vehicle for private equity allocations in both the US and Europe. In the US the portion of private equity funds invested in fund of funds has increased from two per cent in 1997 to 11 per cent in 2003. The portion invested in funds of funds in Europe has increased from 16 per cent in 1999 to 41 per cent this year.

‘It is clear from the 2003 survey results that alternative investments are an increasingly important part of institutional investment portfolios in markets around the world,' said Nigel O'Sullivan, managing director at Goldman Sachs International's Pension & Insurance Strategy Group. ‘With each survey we discover institutions taking even greater advantage of the benefits provided by these investments.'

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