Three years into a North American economic recovery of slow but steady GDP growth, most investors have not seen improved economic performance translate into portfolio earnings. Yet despite the headwinds facing public markets, private equity continues to represent an alternative investment strategy that is delivering sustained investor returns.
The realities of today’s public markets, such as continued volatility driven by external events — from fiscal crises in Europe to political gridlock in Washington — combined with normal gyrations from quarterly earnings expectations and high frequency trading, have gradually separated the stock market index from the economic cycle. And as public markets finally edge back to pre-downturn levels, public market investors must face the discouraging fact that recent stock market gains — while encouraging — have merely returned market values to where they were five years ago.
Canada’s largest institutional investors, which require steady long-term portfolio gains to fund their pension obligations, have participated in the growth of private equity markets and are continuing to allocate more capital to the sector. In particular, the Canada Pension Plan Investment Board (CPPIB), Canada’s largest investor, held 17.1% of its total assets in private equity investments as of December 31, 2012, while OMERS increased its private market investments (consisting of private equity, real estate and infrastructure) to 40% during the 2012 period.
Globally, according to Preqin’s Investor Outlook, a strong majority (85%) of large international investors stated that their private equity portfolio returns met or exceeded expectations in 2012, and almost a third (27%) expect to increase their level of exposure to private equity in 2013.
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