NEPC: Endowments, foundations project lower returns for PE

  • 44 pct of endowments, foundations expect PE returns to fall
  • Less than 20 pct see PE returns rising
  • Lack of returns in other assets drives PE-commitment surge

A plurality of endowment and foundations expect private equity returns to decline in the near term, a recent survey says.

NEPC’s survey found that 44 percent of endowments and foundations expect their PE portfolios to generate lower returns moving forward, with another 39 percent saying returns would remain consistent. Just 17 percent of the survey’s respondents said PE would net higher returns.

“At a high level, what we’re seeing is expected returns for endowments and foundations are lower across the board, and private equity is included in that,” said Scott Perry of NEPC. “It is higher valuations affecting lower returns. … The entry multiples are probably the biggest driver of ultimate returns as it relates to PE.”

More than a third of respondents (34 percent) said PE assets were overvalued. Another 37 percent said proper valuations depended on individual strategies.

Next year, California Public Employees’ Retirement System will lower the return premium it expects its private equity program to deliver over the public markets. A recent Johns Hopkins Carey Business School study found the performance of large buyout managers weakened in the years following the global financial crisis, particularly compared with their earlier vintages.

Despite the challenges the PE environment poses, Perry said, many endowments and foundations are increasing their allocations to private equity, given the the weaker long-term outlook on traditional equities and fixed income.

Central banks have kept interest rates at or near record lows for the better part of a decade, which “pushed institutions out onto the risk curve” into assets like PE, Perry said.

Private equity is one of the few asset classes meeting institutional investors’ medium- and long-term-return targets, he said. “The projected returns for PE are more muted, compared to historic returns, they still look relatively good compared to those other asset classes.”

Some LPs are dedicating more time and resources to investing in niche strategies — rather than generalist funds — to avoid the pitfalls of acquiring overvalued assets, the survey says. More than half of respondents said they planned to increase their allocations to growth equity funds.

“We’re putting a greater emphasis on niche strategies,” Perry said. “It’s largely populated by funds that are sub-$1 billion, a little earlier in their life cycles. We think those strategies are a little more attractive because they have a bit more flexibility.”

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Scott Perry of NEPC. Photo courtesy of the firm.