Private equity has room to grow with many public systems underallocated against their PE targets: research

Private equity has a lot more space for growth, with more than 100 public systems under-allocated against their PE targets, according to research from eVestment Private markets.

That gap equals more than $41 billion of potential capital flowing into new funds, the study showed. The company looked at data from hundreds of LPs between April 2019 and June 2019 for its Private Markets Monitor study.

That allocation gap would seem to indicate that fundraising, at least in the public pension world, will continue to be strong. So far in 2019, U.S. firms have raised $197 billion, according to Buyouts research. Fundraising this year is on track to eclipse 2018, with first half pace already 93 percent higher than last year, Buyouts found.

The gap between actual and target allocations at public systems is a natural part of the commitment cycle. Systems usually take a few years to meet their allocation targets. “[It] takes time to put the money to work as you have to wait until the right opportunities arise to make new commitments,” Graeme Faulds, director of product-private markets for eVestment, said in an email to Active LPs. “Allocations are long-term targets and will be achieved over the course of a year or longer.”

According to Faulds, an increase in distributions also plays a factor in why LPs are behind on allocations. “PE managers are achieving good exits at high multiples and therefore returning capital to investors thus reducing their exposure,” he said.

The study found that 25 LPs reported $4.8 billion in commitments to PE funds in June, up from May’s $4.06 billion total. On average, systems invested $110 million per pledge through June, a 57 percent increase over May’s $70 million average. “A number of investors have been increasing their allocations to private markets,” Faulds said.

Washington State Investment Board was the most active public plan by commitment amount in June, according to the report. The system helped drive investments up, committing $650 million to Warburg Pincus’ China-Southeast Asia Fund II and to Apax Partners’ 10th global buyout fund.

Despite the increase in investments, fewer commitments were made through June 2019. Public pensions made 49 commitments to private equity through last month, down from 59 commitments reported in May. “I don’t think it’s something you can draw meaning from,” Faulds told Active LPs in a phone call. “The time of when those commitments were made matters. It could be when they met to make the commitments [or] when the plans closed on a commitment.”

Faulds said that he doesn’t expect to see any significant declines at the end of the third quarter.