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Endowments and Foundations

NEPC: Foundations and endowments upping private equity despite lower expected returns

Foundations and endowments are increasing private equity allocations despite the expectations of lower returns in the future, according to the latest quarterly survey from investment consultant NEPC.

In the survey conducted in October of its endowment and foundation clients, NEPC said 51% of respondents plan to increase their allocations to private equity over the next 12 months, while 39% plan to maintain those allocations and 10% plan to decrease.

Almost 44% of respondents, however, expect private equity to generate lower returns going forward, while 39% believe they will be in line with past returns and 17% believe returns will get higher.

"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, in a news release announcing survey results. "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."

When asked what their biggest concerns with private equity are, 49% said current valuations were a concern, followed by 44% each who said limited access to top funds and fund terms/fees is a top concern. (Multiple answers were accepted.)

The survey also asked endowment and foundation clients to reflect on the 2008 financial crisis.

When asked how their institutions' exposures to fixed income have changed since the crisis, 60% said they have less exposure while 20% each said they have more exposure and their exposure remained the same.

When asked how their liquidity needs have changed since the crisis, 68% said their liquidity needs have remained the same, while 20% said they need more liquidity and 12% said they need less. Sixty-one percent of respondents said they had increased their illquid investments, 29% said they have remained the same and 10% said they decreased their exposure to illiquid investments.

When asked what the greatest threat to their investment program is, 32% said that geopolitics or political uncertainty was the greatest threat, followed by 31% that said a slowdown in global growth. The latter response is down significantly from the a year ago, when 63% of respondents said the greatest threat was a slowdown in global growth.