This lags behind US allocations of around 6.5% and Australasian allocations of just over 5%. However, among both public and private schemes, allocations have grown substantially in the seven years to 2012. Public pension funds increased allocations to 5.6% from 4.5%, and private schemes to 5.3% from 5%. Some of the more seasoned public schemes doubled their allocations in the five years to 2012. However, this was generally limited to the larger and more experienced US schemes, the report said. Also, the research said allocations demonstrated a strong negative correlation between allocations to private equity and to equity in general, highlighting its use as a substitute by pension schemes.
A growing trend to alternatives was also apparent, as the flows to private equity shared a positive correlation to real estate. The research also showed that, while pension schemes’ investment into private equity was growing, it still significantly lagged other sophisticated investors. Allocations to the asset class from family offices and sovereign wealth funds reached 10% and 18%, respectively.
Sven Lidén, chief executive at private equity firm Adveq, which sponsored the research, said this was generally down to restrictions on pension schemes, and that he never expected the allocations to match. “If you include insurance companies as institutions, it goes even further back", he said. “Pension funds are limited in their search, and limiting their proportion to private equity.” Liden does not believe schemes have reached their capacity yet.
Analysis in the report, matched with data from research firm Preqin, showed both private and public pension schemes undershooting target allocations. While public schemes currently allocate more, they are also more ambitious, falling short by 1%. Private schemes surveyed have a capacity for a further 0.7% of allocation.
The use of funds of funds in private equity is also more common in Europe than the US, as well as among smaller schemes. Smaller schemes (less than $1 billion) had 80% of their private equity allocation through funds of funds, compared with 40% for medium-sized schemes and 20% for larger ones.
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