From the blog: Last year, European private equity fundraising reached €74bn (£66bn), the highest level since 2008.
Pension funds directly accounted for more than a third of this capital.
However, while the overall fundamentals are strong, there are concerns that could dampen appetite for European private equity.
Pension funds directly accounted for more than a third of this capital, followed by 18 per cent for funds of funds, often used by smaller pension funds wanting to access private equity.
While the overall fundamentals are strong, there are concerns that could dampen appetite for European private equity
According to the British Private Equity and Venture Capital Association, UK-based private equity funds achieved annual net of fees returns of 14.1 per cent since inception to 2016 – well above the 10.1 per cent achieved by the FTSE All-Share index.
Another reason pension funds are attracted to private equity is the long-term nature of the asset class, which allows it to continue to deliver returns through turbulent market conditions.
Market not all rosy
However, while the overall fundamentals are strong, the current market picture is not entirely rosy, and there are concerns that could dampen appetite for European private equity.
First, the success of the asset class brings with it new challenges. In recent years, fundraising levels have risen consistently, and there is now a record amount of capital available to deploy. This is good news from the perspective of exits, as there are more potential buyers, and company valuations are historically high as a result. However, it makes it increasingly difficult to buy companies at competitive prices, potentially impacting returns from investments made today.
Environmental, social and governance factors have been another concern for pension funds. According to research by PwC in 2015, 97 per cent of limited partners believe this area will increase in importance, while 88 per cent said there was added value in responsible investment.
The challenges of an uncertain global macro environment can also affect investments.
As with investments in any asset class, pension funds need to be aware of the pros and cons of private equity. But with care and focus – and by leveraging the expertise of Europe’s private equity fund managers – they can construct portfolios to deliver strong returns over the long-term.
Marta Jankovic is chair of private equity association Invest Europe and senior responsible investment and governance specialist at APG Asset Management
