Published: October 25, 2006, AltAssets

German institutions are to further increase their commitments to private equity

German institutional investors plan to increase capital committed to private equity investments from currently two per cent to 2.2 per cent over the next three years, according to the latest Adveq study, conducted in conjunction with the University of Applied Sciences in Wiesbaden.

Between 2003, when Adveq did a similar study, and now German institutional investors have already increased their commitment to the asset class from 1.2 per cent to two per cent.

The most important objectives for investing in private equity are portfolio diversification and increasing return, the study found. On average, there is an absolute return expectation of 12.5 per cent and a relative return objective of 397 basis points compared to investment in public equities. The absolute return expectation has not changed since Adveq's 2003 survey but the relative return objective is 33 basis points lower now.

German investors are primarily focused on the European market, where 64 per cent of private equity investments are made. Investments in Germany alone constitute 28 per cent, down from 32 per cent in 2003. In the next two to five years the European allocation is expected to remain unchanged, while investments made in the German market are expected to fall further (to 24 per cent). The allocation to the US is said to decline to 28 per cent from 32 per cent currently. Asia is developing into an important market for private equity investments, with the allocation expected to rise from two per cent today to five per cent over the next three years.

Bruno E Raschle, managing director of Adveq, said, 'In the last few years many German investors have come to recognise the benefits of private equity investment within an equity portfolio and allocations to the investment class have increased as a result. We can assume this trend will continue to be reinforced over the next years.'

Peter Laib, managing director of Adveq, added, 'The study also demonstrates the important role fund of funds play for German investors. This is particularly true for investments that are more distance from the home market, such as in Asia or the US. In these regions many German investors lack their own know-how and their access to local fund managers is limited.'

Currently 40 per cent of German institutional investors have private equity investments in their portfolios. Fund of funds are the most popular way of accessing the private equity asset class (currently used by 51 per cent of institutions), followed by fund investments (41 per cent) and direct investments (eight per cent).