Survey: Endowments and Foundations Unfazed by Private Equity Valuations

About half of endowments and foundations plan to increase their exposures to private equity even as many investors are concerned that the industry’s assets are overvalued, according to consulting firm NEPC.

Fifty-one percent of endowments and foundations intend to allocate more money to private equity over the next 12 months, while 39 percent plan to maintain their current exposures, NEPC found in a survey, expected to be released Tuesday. Eighty-eight percent of the 41 firms surveyed by NEPC are invested in private equity, and nearly a third have a more than 10 percent allocation to the asset class.

Investors have poured money into private equity over the last few years, with industry dry powder reaching a record $942 billion in September, according to alternative-assets data provider Preqin. The surge of capital has pushed up portfolio-company valuations to a level that has many investors, including private equity firms, expecting lower returns.

Valuations were the top concern among endowments and foundations surveyed by NEPC, followed by fees and limited access to top-tier funds. About a third said private equity assets were valued too high relative to historical averages, while 37 percent said only some of the industry’s strategies were overvalued. Seventeen percent of those surveyed were unsure whether the asset class was overvalued.

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As a result of rising valuations, 34 percent of endowments and foundations said they would concentrate on “niche or focused strategies,” according to NEPC. Fifteen percent said they would only re-commit to “strong” private equity firms, while 5 percent plan to adjust their commitments to reflect their concerns about valuations.

The majority, or 56 percent, of endowments and foundations plan to invest in growth-equity strategies, while 49 percent are emphasizing venture capital. Buyout strategies are popular among 37 percent of those surveyed by NEPC.

While 56 percent of endowments and foundations expect their private equity investments to deliver returns on par with or better than historical performance, 44 percent believe returns will be worse, according to the survey.