Pension funds set to increase private equity allocations: survey

March 10, 2020

The majority (79 per cent) of pension fund and private equity professionals expect their passive private equity allocations to either stay the same or increase in 2020, according to a new survey by Torys LLP.

Pension funds, in particular, cited competition for new investment opportunities (65 per cent) and pressure from limited partners to provide co-investment opportunities (57 per cent) as areas where the greatest increases are expected to occur.

Indeed, pension funds are very focused on co-investment opportunities, with 90 per cent identifying them as “a significant pressure point” — one that’s illustrative of a shift in the co-investment landscape.

“Ten years ago, private equity firms would reach out for capital when required, but now pension funds are making their desire for co-investment opportunities clear with their sponsor relations from the outset,” says Michael Akkawi, a partner in Torys’ Toronto office.

The survey also found that growing competition and a shortage of transaction opportunities for good assets will result in rising valuations. Additional challenges included increased allocation of capital and the growing presence of certain types of investors, such as family offices.

Economic downturns are also top of mind. A majority of respondents said they believe the overall economic climate, both in Canada and internationally, will worsen.

“Although our respondents were based in Canada, the markets in which they operate are, in many instances, global, and therefore their responses to the survey should be considered through that lens,” says Akkawi.

What’s interesting, however, is that pension fund professionals appeared to be much more concerned than their private equity counterparts about geopolitical risk. Only three per cent of private equity professionals named it as their primary concern compared to 21 per cent of pension fund professionals.

The gap is likely attributable to differing investment strategies. “Most mid-market private equity funds are focused on North America, Canada or a particular region, so geopolitical risk isn’t going to be a concern for funds invested in a stable region, like North America,” says Guy Berman, a partner at Torys. “It’s a different story for pension funds, who tend to invest globally.”

It’s not that global issues, like the geopolitical risks to supply lines, aren’t on everyone’s mind. “It’s just that they’re not top of mind for private equity professionals,” he says.

Similarly, while 17 per cent of private equity professionals cited rising valuations as their second biggest concern, only four per cent of pension fund professionals did so. Here, investor expectations might explain the gap. “Generally speaking, private equity is more likely to be looking to hit a home run by buying low during downturns, while pension funds are looking for more stable returns,” says Berman.

The survey’s most surprising finding, according to Akkawi, may be how respondents perceived the opportunities to raise capital. Some 43 per cent said they believe it would become more difficult, while just 19 per cent expect it to become easier and 38 per cent don’t anticipate any substantial change.

However, Akkawi believes these results might arise from the timing of the survey. “It could be that the funds we surveyed had just raised capital and, therefore, believed it would be hard to do so again in the short term. But the reality is that pension funds and other investors need to deploy capital — private equity is a very attractive area in which to generate returns and private equity wants to be on the buy side during a downturn. So overall, I don’t think they’ll have such a hard time raising money.”

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