In a world where big institutional investors find themselves starved for returns, it’s not surprising that they have steadily increased allocations to private markets, due to consistent outperformance of the asset class.

A survey conducted by Pitchbook, shows the top 25% of PE and VC managers (funds in the top 25% of performance) have significantly outperformed public equities to the tune of five times or more.

A similar analysis was conducted by JPMorgan Asset Management in 2018. The study estimates that in the 15 years through the end of 2017, private equity generated a 14.4% net annual return versus 8.8% for the MSCI World equity index.

The old saying “follow the smart money”—meaning keep an eye on where the pros are investing—may never have been more apt than it is today. An objective look at investment trends and returns points squarely to many institutional money managers looking less at the public stock markets and more at private equity investments.

The Pitchbook study also revealed that of the 101 institutional limited partners (LPs) and public equity allocators interviewed, 66% said they would be increasing, slightly or significantly, their allocations to private market strategies (PE, VC direct investing) over the next five years. That percentage far outpaces other asset classes, most of which will likely stay the same or go down slightly.

According to the latest research conducted by Cambridge Associates, top-decile performing institutional investors, Princeton University, University of Texas, Columbia University and Yale University for example, have increased their private investment allocations to a mean of 40%.

For large allocators of capital this type of persuasive research is sinking in.

The San Francisco Employees’ Retirement System (SFERS) reported that for its 12-month fiscal year ending June 30, 2019, the $25.7 billion system’s strong private equity returns of 17.4% helped propel overall returns, despite mixed public equity returns.

And the Teacher Retirement System of Texas, the 6th largest pension fund in the U.S., announced that it plans to increase allocations to private equity in an attempt to protect the plan from equity risk, as a stock market downturn in the near future is a growing concern for many investors.

Research shows stocks are stunningly riskier than private equity funds, which have inherent downside risk protection. Hamilton Lane and JPMorgan Asset Management show that two-fifths of publicly-listed equities experience “catastrophic loss,” defined as a 70% or greater drop from peak value, with minimal recovery. Yet less than 3 out of 100 private equity funds suffer similar losses.

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