German institutional investors have already begun responding to the private equity legislation allowing onshore funds to return to Germany which will go into effect in January 2007. In fact, institutions such as pension funds, insurance companies and relief funds have raised allocations to private equity by 25% increasing their commitment to the asset class at a pace markedly above normal, according to a study by the Wiesbadener Private Equity Institut.
European private equity funds, in total, currently account for 27% or US$306.5bn of the total funds raised between 1999 and 2005 making the global total for PE funds US$1.126trn. Secondaries funds globally account for 3% of the total funds under management at US$37bn with Europe accounting for US$10bn.
While Germany is currently mirroring the investment modelling pattern previously observed in the US and the UK, it is doing so at an accelerated pace. Its higher than average commitment to secondaries funds sets this trend in sharp relief.
Sixty two percent of German institutional investors that have previously invested in private equity were cited as intending to commit to secondaries in the future. This marked interest in secondaries is highlighted by German institutional investors allocating a significant 7% to the asset class while the global average is 3%. The study showed that 18% of German institutional investors have already invested in secondaries funds and 11% of the capital invested in private equity was sold via secondaries transactions. These figures highlight the increasing importance of secondaries funds to the primary market as a liquidity solution.
This massive upswing in the depth and breadth of commitments from German institutions is because they have some ground to make up. In the past seven years the treatment of private equity funds has been vague under German law so many institutional investors eased off the asset class. Now, the German coalition has promised new law with regards to private equity and institutions are returning to the asset class but are they too late?
Many managers agree that the recent inflows of capital have limited the number of investment opportunities available and the funds that some institutions that showed up late to the party have to invest in are of lower quality than they may have expected. However, there still seems to be some steam left in private equity and this increased inflow from German will simply join the others from the US and the UK.