NEPC Survey: Endowments and Foundations Increase Private Equity Exposure Despite Expecting Lower Returns

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NEPC, LLC (www.nepc.com), one of the industry’s largest independent, full-service investment consulting firms to endowments and foundations, today announced the results of its Q3 2017 NEPC Endowment and Foundation Poll, a measure of endowment and foundation views on the economy, investing, and key market trends. For the fourth consecutive year, this survey focused on how endowments and foundations invest in and view private equity.

Results show that nearly a third of respondents (31%) have more than 10% invested in private equity, and just 14% have no exposure to private equity. And despite anticipating lower returns than in the past, almost all respondents plan to either increase or maintain their exposure to private equity over the next year.

Click here for an infographic that highlights the survey’s primary findings.

According to the survey, 90% of respondents plan to increase (51%) or maintain (39%) their allocation to private equity over the next 12 months, while just 10% plan to decrease exposure. However, nearly half (44%) of respondents expect private equity to generate lower returns than in past. Just 17% of respondents anticipate higher returns, slightly higher than in 2015 (15%) and 2014 (10%). The remaining 39% expect returns to be in line with past results.

“Although investors’ outlook for private equity may be cooling, almost everyone plans to either increase or at least maintain exposure,” said Scott Perry, Partner in NEPC’s Endowment and Foundation Practice. “While they recognize that future private equity returns may be lower than in the past, private equity is still expected to provide a better long-term return than other asset classes. However, we continue to counsel our clients to take a thoughtful approach to investing in private equity. This often means focusing on niche strategies and seeking out managers who have displayed discipline around capital deployment.”

Nearly half (49%) of respondents cited current valuations as one of their biggest concerns with private equity, down from 56% in 2016. Other top concerns include limited access to top funds (44%, a jump of 20 percentage points from 2016) and fund terms and fees (44%, compared to 42% in 2016). When asked whether private equity is overvalued or undervalued relative to historical averages, 37% said the answer depends on the strategy type. More than a third (34%) think private equity is overvalued, up 10 percentage points from 2016 (24%). And, more than half (54%) of respondents said current valuations will impact their future private equity commitments, with 34% indicating their focus will be on niche or focused strategies.

Nearly a Decade after the Financial Crisis, Investors Take on More Risk and Illiquidity

The survey also examined how portfolios, strategy and structure have changed at endowments and foundations in the nearly ten years since the 2008 financial crisis. Almost two-thirds (64%) of respondents said less than 50% of their current team, including investment committee and staff, was in place during the crisis; however, this level of change is to be expected given term limits and natural turnover. Sixty-one percent of respondents said they have increased illiquid investments since the financial crisis, while 29% said their illiquid investments have remained the same. Just 10% said they have decreased illiquid investments. This is an interesting trend in light of the fact that 88% of respondents feel their liquidity needs are the same if not greater than ten years ago.

Investors More Optimistic about U.S. Economy, Less Concerned about Global Slowdown

The Q3 NEPC Poll provided an update on investors’ outlook on the U.S. and global economies and gauged their concern about potential threats to their portfolios. Key findings include:

  • Nearly one third (32%) of respondents said they think slowdown in global growth poses the greatest threat to their investment performance over the near term, a sharp decline since the Q3 2016 survey (63%). This result was tied with geopolitics and political uncertainty (also 32%) as the biggest threat.
  • 16% of respondents considered global deflation the greatest threat to investment performance in Q3 2016, while just 4% said the same today. Concerns about a potential overseas conflict, however, increased from 4% in Q3 2016 to 10% in 2017.
  • Nearly half (46%) of respondents think the U.S. economy is in a better place compared to this time last year, compared to 25% of respondents in 2016. Just 5% of respondents think the economy is in a worse place, down from 13% in 2016.

About the Survey

The Q3 2017 NEPC survey was conducted online by the Endowment & Foundation Practice Group in October 2017. Copyright is held by NEPC. For the full survey results, contact Danielle Orsino at danielle@waterandwallgroup.com.

About NEPC, LLC

NEPC® is an independent, full-service investment consulting firm, providing asset allocation, manager search, performance evaluation, and investment policy services. We work with discerning investors on both an advisory and discretionary basis. We service over 100 endowment/ foundation relationships, representing over $60 billion in endowment/ foundation assets, from our offices in Boston, Atlanta, Charlotte, Chicago, Detroit, Las Vegas, Portland and San Francisco. We encourage your comments and feedback, as well as any inquiries you may have about our firm or our consulting services. Learn more at http://www.nepc.com/focus-areas/endowments-foundations

Statistics as of 09/30/2017

Please note that all investments carry some level of risk. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Please contact NEPC for current information about our views of the economy and the markets. Past performance is no guarantee of future results.

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Business Wire: 13:30 GMT Tuesday 14th November 2017

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