Institutional appetite continues to grow

The seventh edition of the Russell survey on alternative investment found that institutional demand for private equity was growing in each of the main markets apart from the US. The biennial survey, which has previously been conducted in association with Goldman Sachs, canvassed the opinions of 327 of the largest institutions currently investing in alternative assets.

The report found that European institutional allocations to private equity have grown steadily since 1996, when the survey was launched. Somewhat surprisingly, until 2003, Continental European institutions invested a greater percentage of their overall allocations in the asset class. This has changed in the latest survey, with UK-based respondents now investing an average of 5.3%.

This strategic shift in allocations, away from quoted equities and bonds into private equity, is expected to be even more pronounced by 2007, when the survey predicts that the European average allocation to private equity will be 6.7%. Looking at the long-term perspective, this represents a huge increase on the 1.9% average commitment that was recorded when the survey was launched.

In terms of geographical and stage commitment, the survey showed that European institutions are still overwhelmingly investing in European buyout funds. Just over 88% of the capital committed found its way into buyout or development capital funds, with 61.7% of it bound for Europe.

This capital is also being channelled to a far greater degree through funds of funds. For the first year ever, more European capital found its way into the asset class through funds of funds than through direct fund investments.

Respondents were also asked which type of private equity investment they were most likely to favour during the next five years. Mezzanine, venture capital and special situations found most favour, with respondents favouring buyouts dropping from their 2003 peak.

In terms of performance, the survey showed that return expectations have remained stable. In 2003, the expected median three-year return for the asset class was 11.0%, while in this year’s report it had dropped slightly to 10.5%.