Institutions favour lower risk

Many institutional investors have adjusted their investment strategy both by sector and by region to reduce the levels of perceived risk in their portfolios, according to The Limited Partner Perspective 2003, a research report by AltAssets. The report covers 100 of the most active institutional investors in private equity, 50 in North America and 50 in Europe, accounting for over $100bn of commitments to the asset class.

“The report suggests that institutions in both regions are gently optimistic about the prospects for a medium-term recovery in private equity returns,” says Chris Davison, head of research at AltAssets. “But at the same time there has been, and will continue to be, a shift in favour of lower risk in their portfolios, a fact that has been evident in the starkly dichotomised fund raising experience of private equity firms over the last 12 months.”

One of the biggest beneficiaries of this change in appetite will be Europe and its mid-market. There is a strong sense among both European and US investors that the region’s buyout markets have matured to a level that warrants a sharper focus.

There has been a clear shift over the last two years away from venture capital towards what are perceived to be the safer segments of the asset class. About 25% of institutions in both regions said they had cut their venture exposure, while nearly a third had increased their allocation to funds investing in mezzanine and special situations. Nearly 30% had upped their commitments to buyout funds.

The report also revealed some 42% of European institutions and 24% of US institutions planned to increase their allocation to private equity over the next two years. The main driver was the expectation that the asset class will continue to generate superior risk-adjusted returns.

The survey also includes a list of the most highly rated buyout and venture firms in the US and Europe. The top rated US buyout and venture firms were Bain Capital and Sequoia, respectively. The top-rated European buyout and venture firms were Permira and TVM.