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Institutional investors turning to private equity as source of alpha

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GLOBAL - Institutional investors are turning to private equity as a source of alpha at a time when low returns are expected for several asset classes in the current financial context.

According to a survey by SEI and Greenwich Associates, institutional investors are keen to increase their allocation to private equity but are asking fund managers to improve reporting and risk-management measures.

Rodger Smith, managing director at Greenwich, said: "As investors are looking to achieve higher returns in an increasingly challenging return environment, private equity is coming back, but standards are higher across the board."

The survey found that institutional investors generally invest in a wide range of sectors, with 80% allocating to venture capital, leveraged buyouts, growth capital, distressed investments and mezzanine capital.

The secondary market for private equity is also thriving as investors buy or sell to meet liquidity demands or pick up deals at deeply discounted prices.

As a result, 26% of the investors surveyed plan to increase their allocation to private equity over the next 12 months.

However, investors and consultants differ on their investment objectives.

Two-thirds of investors said return potential was the main objective, while only 10% of consultants opted for this requirement.

Roughly half of consultants focused more on diversification, saying this was their primary investment objective, as opposed to only 18% of investors.

The survey also found that the criteria for evaluating managers have become more stringent.

Investors still believe people, investment philosophy and investment performance are the most important criteria when it comes to investing in private equity, but they have increasingly emphasised the importance of the process itself - portfolio transparency, fees, quality of reporting and communications.

According to the survey, a number of recent successful exits have raised expectations even further.

More than 300 exits worth an aggregate value of $120bn (€83bn) were recorded in second quarter against $81.5bn in the second quarter of 2010.

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