Changing tastes: institutional investors satisfy growing PE appetite
The private equity sector continues to benefit from Institutional Investors’ growing interest. Based on the statistics compiled via Money Market Directories (MMD), allocations over the past five years have steadily grown, reaching $750.9bn as of 2016YE, or a 5.8% CAGR. While the global increase in 2016 was a mere 2%, the year prior registered a record annual ramp up of 13%; the latter thanks to a large spike in APAC allocations, growing from $56.7bn to $152.5bn (up +169%). In 2016, APAC continued to represent the region with highest YoY growth in PE allocation (+15%) and while also recording the highest regional five year CAGR of +31%.
In contrast, EMEA was the only region in 2016 with decreasing PE allocations (down 9%) with investors tightening their investment in the region due to economic, social and political uncertainties. The UK’s decision to leave the EU in June 2016 seems to have further dented Institutional Investors’ confidence.
PE allocations in US market remained rather stable, growing by only 1% YoY to $444.6bn by 2016 year-end. This is consistent with the region growth trend to grow YoY at low single digits and a five-year CAGR of 2.4%.
When we dig deeper into PE allocations of different types of Institutional Investors (excluding Family Offices) by region, further interesting trends emerged.
Growth in APAC allocations in 2016 remained strong in comparison to the year prior (+15%). APAC interest in Private Equity appears to be heavily dominated by Sovereign Wealth Funds (SWFs) with 91% of all PE allocation coming from these investors in 2016.
Notably over the past two years, SWFs grew into the leading group of Institutional Investors within this asset class and were also the main driving force behind the sizeable uptick in PE allocations in APAC in 2015 (up 241%).
In terms of other types of Institutional Investors in APAC, SWFs were followed by Unions, Governments and Corporations - all combining to represent 9% or $14.9bn out of $174.7bn invested into Private Equity by APAC Institutional Investors.
Interestingly, all Institutional Investors apart from Governments had downsized their PE allocation in 2016 (most by double digits) with Unions, Private Foundations and Tax Exempt Organizations showing the largest contractions (-67%, -42% and -40% respectively). Governments were the only investors to buck the trend, increasing their allocation to the sector by 25% from $222.2bn to $270.0bn.
This article is an excerpt from the EMEA Private Equity Market Snapshot, a quarterly review of the private equity market from S&P Global Market Intelligence.