Private equity is a popular asset class with family offices and foundations, with one in three of respondents to a recent survey saying they commit at least 20 per cent of assets to the sector.

Editor's note: An earlier version of this article appeared in WealthBriefing, sister publication to WBA. As the issues involved are relevant to the Asia market, we think readers will find them relevant also. 

Private equity is a popular asset class with family offices
and foundations, with one in three of respondents to a recent survey saying
they commit at least 20 per cent of assets to the sector.

A survey among 30 family offices and foundations undertaken
by the publication Private Equity International and Swiss-based Montana Capital
Partners reveals that more than half of institutions questioned have allocated
more than 15 per cent to private equity.

The study, carried out in June this year, found a different
pattern among different type of investors, suggesting family offices and
foundations are taking a particularly long-term approach. Family offices, given
the relative flexibility of such institutions compared with pension schemes –
the latter are often constrained by specific rules – have often been at the forefront
of investing in alternative asset classes, such as private equity and hedge
funds.

Private equity has experienced a gyration in fortunes in
recent years. Prior to the 2008 financial crisis, the sector, buoyed by
plentiful credit, witnessed a buyout boom; the sector went sour when bank
leverage sharply contracted, leaving many investors sitting on unused cash,
hitting internal rates of return.

Industry figures suggest the fund-raising climate – and general
sentiment – for private equity has improved. According to Preqin, the research
firm, a total of $139.1 billion of money was raised by a total of 209 funds in
the second quarter of this year. However, there is a notable issue of unused
funds – “dry powder” in the sector at present, that organisation has noted. As
of August this year, Preqin reckons there could be more than $1.0 trillion of
such dry powder.

Average allocation

The PEI/Montana report showed that the average allocation
for pension funds and insurance companies stands at 7.3 per cent and 3.6 per
cent respectively. The average private equity allocation among the family
offices and foundations in PEI’s
study was 14.7 per cent.

Some 39 per cent of respondents said they would be upping
their allocation to private equity in the year ahead, while just under a third
(29 per cent) will be maintaining current levels.

“It’s clearly positive for private equity fund managers to
see such strong interest among these investors and that many are looking to up
their allocations is testimony to the relationships the industry has built with
them,” Dan Gunner, director of research and analytics, PEI, said.

“The asset class has matured to a point where smaller
investors feel very comfortable with it and, being more flexible than some of
the bigger institutions, are able to exploit opportunities with non-traditional
assets.

“It’ll be fascinating to see how their relationships with
GPs evolve as family offices increasingly look to exploit direct and
co-investment opportunities as well as those in the secondary market.”

In terms of accessing the asset class, the majority of
family offices investing in private equity – 87 per cent of those questioned -
use primary funds. Fund of funds are also popular with more than half of those
institutions questioned (53 per cent) using such vehicles. Over one third (37
per cent) are co-investing with funds while one in ten look for co-investment
opportunities with other family offices.

 The secondary market
is increasingly popular for family offices keen to exploit attractive cash flow
profiles, earlier liquidity opportunities and a shorter J-curve. Around two
thirds of the institutions questioned are actively investing in secondary funds.
A third (30 per cent) currently purchase direct secondary positions and one in
ten has sold positions in the secondary market.

Some see increased secondary activity as a consequence of
regulatory change, which means that banks and other financial institutions are
being forced to offload assets, often at discounted prices. Some 30 per cent of
the family offices and foundations questioned expect that supply of assets to
slow.

The majority of respondents, however (63 per cent), agrees
that the secondary market is now well established and deal volume will stay at
the same level and stabilize in the short term, particularly at the small end
of the market.

Most family offices (57 per cent) are forecasting IRRs of 15
per cent from primary fund investments.