Chart of the week: Sovereign wealth funds lead private equity charge

LPs may be driven to the asset class by lower bond yields.


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LP allocations towards private equity have remained steady in recent years, averaging 21 percent in August 2013 compared with 17 percent for the same month in 2016.

Almost two-thirds of LPs allocate less than 10 percent of their investment portfolio to private equity, with a mean of 4 percent. However, the 10 percent of investors that devote 75 percent to 100 percent of their portfolio to the asset class ensure the overall average is kept relatively high.

Sovereign wealth funds have demonstrated one of the biggest increases in allocation to private equity over the past two years, notably the Australia Future Fund, which has increased its allocation to more than 10 percent since 2013. SWFs have overtaken private pension funds to become the second largest group of investors behind public pensions in the asset class.

As LPs experience falling returns from their bond holdings, private equity investments are becoming a useful way to improve income – the Government Pension Investment Fund of Japan, which lost $52 billion in fiscal year 2015, has mandated State Street Trust and Banking to help it move into alternative assets.

Much like the SWFs, LPs are likely to increase their allocations to private equity, regulation permitting. August 2017’s figure may show a higher percentage devoted to the strategy than previous years.