Private equity returns are expected to fall, causing some long-time investors in the area to either ease off the asset class or invest in new alternative categories.
Increased competition for deals, an abundance of investor capital and the entry of hedge funds on private equity turf are lowering return expectations.
Performance that merely exceeds stock and bond returns seems to be enough for investors new to the asset class; they are adding and increasing allocations at an ever-growing rate.
Seasoned investors, however, are taking another tack. The $197.4 billion California Public Employees' Retirement System, Sacramento, reduced its private equity allocation by a percentage point to 6% earlier this year. A few other pension funds are considering lowering their allocations by a percentage point or two now, with a view to slowly moving them back up in the future.
Many large private equity investors also are looking for newer niches to invest their money in. Some are diversifying into private equity real estate funds, hedge funds and timber, said Gary Robertson, senior vice president of consulting firm Callan Associates, San Francisco.
According to a report to its board, CalPERS staff expects net annual returns to fall to 13.5% — the $9.3 billion private equity program earned a return of 20.8% in the fiscal year ended Sept. 30. Earlier this month, the CalPERS board adopted a plan that increases the program's international investments and invests more in niche programs such as clean technology and the California Initiative Program, which focuses on in-state investing.