Indian PE funds see light, finally

Over 100 global endowment funds intend to invest in this asset class

Private equity funds in India who are in a fund-raising mode can heave a sigh of relief as a recent global research of 100 global endowment funds have indicated they intend to maintain their allocations to this asset class over the next 12 months.

Global endowments are major investors in private equity, typically allocating a large proportion of their assets under management to the asset class. According to a global research of 100 endowment funds by Preqin, the average target allocation was to the tune of 11.8 per cent to private equity.

Around 15 India-focussed PE funds are in the process of raising in excess of $5 billion.

According to Preqin, despite the financial turmoil and poor returns recorded by private equity over the past year, the vast majority of endowments as limited partners plan to maintain their allocations to the asset class over the next 12 months with only 9 per cent intending to decrease their allocations to private equity in the coming year.

“Over the long term this percentage increases, with 14 per cent of respondents planning to decrease their allocations to private equity over the next three to five years. However, 13 per cent of respondents are looking to increase their allocations to private equity over the next 12 months, and over the long-term 32 per cent of endowments plan to increase their target allocations to the asset class.

Both of these figures outweigh the proportions looking to decrease their allocations over each time period,” the report added.

The report while talking on new commitments said, 63 per cent of respondents will invest in the asset class at some point before the end of 2010, with 21 per cent looking to invest before the end of 2009.

One New York-based endowment reasoned that “the next 6-18 months will be a great time to invest as credit is starting to return to the market and this will make investments in the asset class more appealing”. 7 per cent stated that they would not be investing in the asset class for the next two years, with one European endowment stating that the private equity market was “currently overcrowded and full of problems”. A considerable 24 per cent of respondents are avoiding the asset class until 2011 or later.

In recent weeks, several reports have suggested that many endowments are being forced to sell their interests in the secondary market as a result of being above their target allocations to private equity. “From our survey, we found that 74 per cent of respondents are either at or below their target allocation to private equity, with just over a quarter stating that they are above their target,” the report added.

Interestingly, a large proportion of endowments that reported being above their target allocations to private equity have assets in excess of $500 million which suggests it is the larger, more high-profile funds that tend to employ significant over-commitment strategies that are most affected.

Additionally, a more pressing issue forcing some endowments into secondary sales is liquidity, which some reports have alluded to.

“Our survey indicates although endowments’ attitudes towards private equity have been significantly affected by the global financial crisis, in general, they are still seeking to invest in the asset class. However, future investments will be reviewed under a more stringent due diligence process, and there is likely to be a slightly reduced level of investment in the short term,” Preqin’s report added.