S&P Global — 19 November 2024
Daily Update: November 19, 2024
Allocations to Private Equity Remain High, Despite Questions
By Nathan Hunt
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Large pension funds and university endowments have increased their allocated levels of investment in private equity in recent years. During the era of lower-for-longer interest rates, many large institutional investors looked outside of traditional asset classes to increase their rates of return. Private equity funds, which benefited from lower-cost capital, were attractive places to invest as they outperformed other asset classes. Interest rates have increased, cooling the deal environment that powered higher returns, but institutional investors have maintained high allocations to private equity, even as some market observers question whether private equity’s returns on paper will translate into actual value creation.
The investment management companies for Harvard and the University of Texas/Texas A&M have the highest allocations to private equity among those endowments that share such data. The University of Texas/Texas A&M's investment arm has allocated 30% of its assets to private equity, with US$22.19 billion in committed capital. Harvard’s investment arm has allocated 39%, with US$19.77 billion committed.
Pension funds are also allocating large percentages to private equity. The top 20 global pension funds with the largest dollar allocation to private equity have invested US$707.60 billion in 2024. The Canada Pension Plan Investment Board has allocated 24.6% of its assets, or about US$143.86 billion, to private equity. Most of that has been committed to buyout funds, primarily in North America. The California Public Employees' Retirement System and the California State Teachers' Retirement System have also allocated tens of billions to private equity.
While allocations to private equity from pension funds remain high, the actual committed capital lagged in the first and second quarters, although the shortfall was not large. According to S&P Global Market Intelligence, pension funds targeted an allocation to private equity of US$276.4 million at the median in the first quarter, but the actual median allocation was short at US$272.8 million. In the second quarter, the median target allocation was US$279.9 million, and the median actual allocation was US$269.7 million. These shortfalls can be explained by the fact that allocation targets are often approximated since calls for capital from private equity funds cannot be predicted with absolute accuracy.
While university endowments were initially slow to invest in alternative assets, they have since become the largest allocators to such investments as a percentage of total assets under management, according to Paul Sinthunont, Preqin's head of asset allocation research. Much of the allocation to private equity for endowments has come at the expense of hedge funds that have underperformed in comparison, net of fees. However, the higher returns from private equity have raised questions among market observers.
"Is it a real exit that has led to a distribution to a [limited partner] or is it something else [such as net asset value] loans or dividend recapitalizations?” asked Sinthunont. “If it's an exit, was it due to selling the best assets too early?"
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