PE Data Snapshot – Non-U.S. Investor Influence Grows; Public Pension Fund PE Dominance Declines

The momentum behind the globalization of private equity is stunningly strong. Non-U.S. Sovereign Wealth Funds – now the most significant investors in private equity after public pension funds – have seen their share of annually committed PE capital rise to 13 percent in 2014 from just 5 percent in 2010, according to Palico estimates. Meanwhile, polls carried out this summer among the more than 1,100 PE fund managers from over 70 countries who are Palico members, reveal that 91 percent believe diversifying their investor base is “a major fundraising priority.” More than four-fifths report that they are increasingly soliciting capital from investors outside the U.S.

Only some 14 percent of capital committed to private equity funds in the first three quarters of this year came from public pension funds, about half the annual share registered by those funds as recently as 2010. Given the dominance of public pension funds, and especially American public pension funds, in fund investing, the dwindling market share of these state-backed pools is another sign of private equity’s shift towards non-U.S. capital.

Building an Uncorrelated Investor Base

The average public pension fund allocation to private equity has held remarkably steady in recent years, hovering near 7 percent of investment portfolios; so it’s not public pension fund distaste with the asset class that’s behind the rising market share of non-U.S. investors. One of the major catalysts is fund manager interest in building uncorrelated global investor bases capable of withstanding national, or even regional financial crisis. On the investor side, the most important driver is the rapid formation of investment capital in emerging markets and a relative dearth of investment options that can credibly offer long-term double-digit returns.

So what does the growth of capital commitments, as well as influence, from outside the U.S. mean for where and how private equity fund managers invest?

Increasing Co-Investment & Secondary Investment

It’s likely co-investment and secondary fund investment will gather strength as relatively new investors outside the U.S., whether SWFs, pension funds, family offices, banks, insurers, endowments or foundations, try to get up to speed quickly in the asset class, while keeping fee drag down. A large number of non-U.S. investors are still building towards their target PE allocations.

Growing Diversity of Investment Destinations and Strategies

The move towards non-U.S. capital also implies a rapid diversification of investment destination. Emerging markets investors are the fastest growing source of non-U.S. commitments. The managers these investors back can be expected to increasingly turn their attention to the developing world – it makes both marketing and investment sense – with returns helped by their limited partners’ local knowledge.

Palico’s global private equity marketplace is positioned to help far-flung limited partners and general partners discover and engage with each other on investment and commercial opportunities, as non-U.S. capital and strategies grow in importance.

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