The Global Real Estate Sustainability Benchmark (GRESB), which will launch its third annual sustainability survey today, has announced a partnership with the Global Reporting Initiative to enhance sustainability reporting.

The survey allows participating fund managers to benchmark their portfolio on environmental and social performance against their peers.

The GRESB Foundation is backed by 30 institutional investors with more than $1.7 trillion in combined capital and the survey acts as a tool for those investors to start a dialogue on social and environmental issues with their real estate managers.

Combined, they have an average stake of more than 4 per cent in each of the listed property companies that responded to the survey last year.

In 2011 the survey covered 340 real estate managers, 21,000 properties with a total value of $928 billion.

These properties emit about 34 million tonnes of carbon dioxide, demonstrating that institutional engagement with the property sector can have a substantial impact on the environment, according to the 2011 report.

Evidence of such an impact is that the 2011 combined emissions represent a 1.8-per-cent reduction from the previous year.

The survey, which was designed in 2009, captures more than 50 data points of environmental and social performance integrated into the business practices of each real-estate company or fund.

Last year listed-property funds’ average score was 41 out of 100.

Colonial First State Global Asset Management was the highest ranking manager.

 

To participate in the survey click here

Thank you to all our readers who responded to the Top1000funds.com Audience Behaviour Survey.

The survey’s overall aim was to allow us to better tailor our portfolio of products and events to you our readers.

Some of the interesting findings included that our typical reader is aged between 41 and 50 and earns between $96,000 and $150,000 a year.

They are fans of apple products, with almost half owning an iPhone, closely followed by Blackberry users, and 37.3 per cent own an iPad.

More than 40 per cent of those surveyed who said they did not own a tablet plan to buy one in the next six months.

Laptops are the most commonly used portable device, followed by smartphone, Blackberry, tablet, and eReader.

When it comes to social media our readers are unlikely to be following Lady Gaga, with 35.5 per cent using social media to keep up with the news, while 27.1 per cent use it for business communication.

As part of the survey, Top1000funds.com was giving away one iPad2 to a lucky respondent.

The winner was a portfolio manager at a Dutch fund who wished to remain anonymous.

Property investors should look beyond the current languid growth in developed market economies and position their portfolios for a recovery in the world economy in 2013 and 2014, Mark Roberts the global head of RREEF Real Estate says.

Roberts, who also chairs the National Council of Real Estate Investment Fiduciaries (NCREIF), points to initial yield spreads for property, that are wide compared to bonds and real-estate capital values that remain well below peak levels, as indicators of the growing attractiveness of the asset class.

Along with potentially attractive valuations and solid income growth, Roberts says that the lack of new construction in developed markets in the US and Europe also adds to the case for investing in property.

“If you go back in time and buy when there is limited new construction, you stand a good chance of producing good relative performance. So it is the initial yield spreads, it is having values that are below replacement cost and it is also a limited amount of new development,” Roberts says.

“Now, is it like that everywhere? The answer is no. Globally what you have to look for is what are the cities that have exposure to the type of competitive advantages or industry concentrations that are going to benefit from any recovery.”

In its latest global market outlook, RREEF recommends being overweight the US and Asia Pacific region, while underweight Europe.

A typical global portfolio would be split 34 per cent between the US and Asia Pacific, with Europe making up the remaining 32 per cent.

Roberts argues that last year saw an inflection in the US property market, with vacancy rates falling as unemployment fell.

Typically, a 1 per cent fall in the rate of employment leads to a 1 to 1.5 per cent drop in commercial vacancy rates nationally, he says.

Roberts points to the initial yield spreads for property relative to bonds that have reached historic levels and stand in excess of 400 basis points, compared to a longer term average of 100 to 300 basis points as an indication of the attractive value of property.

In markets like the US and the UK, property prices are still at least 10 to 15 per cent off their peak levels, he says, with little new construction adding to limited supply of core, high quality properties.

RREEF predicts that total returns in a majority of markets and sectors globally will range between 6.5 and 11 per cent, providing similar returns to equity with less volatility.

Roberts expects these fundamentals to result in increased capital flows into property in 2012.

“Property has always been the smallest midget at the circus, so to speak,” he says.

“Property has come of age as an asset class and there is a lot more transparency in terms of the securities, debt and listed markets. People are able to price risk better and there is growing transparency globally.”

Allocations to property by large institutional investors are holding steady at between 8 and 12 per cent, according to Roberts.

 

Asian allocation to real estate rises

However, RREEF is seeing growing interest from Asia.

Niel Thassim, RREEF’s head of the Asia Pacific region, says that the manager has raised more than $2 billion from Asian investors in the past two years to invest in core properties in what he describes as gateway cities in developed markets.

RREEF expects growing capital flows into property from large pension funds in Japan, South Korea and China, which Thassim says have traditionally low levels of allocation to real estate of less than 1 per cent of portfolios.

“We are seeing a lot more exposure in Japan, Korea and China to real estate from the pension fund side,” he says.

While funds have typically been interested in the equity side of property, Thassim says there is also growing interest in debt opportunities in developed markets.

In the Asia Pacific region RREEF recommends targeting the retail and logistics sectors more broadly and the office sector selectively, particularly in Australia and Japan.

Retail and logistics-focused commercial space is aimed at tapping into the growing middle class in the region, with the need to upgrade obsolete properties to cater for growing demand.

These sectors are predicted to have stronger income growth than office and residential sectors.

In the US Roberts says that the modest pro-cyclical approach that focuses on the industrial and office sectors.

While apartments have performed strongly, Roberts argues that investors are “waking up to the industrial market” after seeing 125 million square feet of warehouse space absorbed nationally, which is a return to historical averages.

“The initial yields and the cap rates are 200 or 250 basis points higher than the apartment sector, so it has a higher income yield, and on the growth side, when you look at apartments you are only going to get growth through increases in rents for a couple of years,” he says.

“But when you look at the commercial sector, you get the benefits of declining vacancy, rent growth and rents growing up to market when you start looking out to 2013 and 2014.”

Roberts recommends investors look to cities and regions that will benefit from a recovery in global trade and/or have resilient competitive industries.

These include cities like Hong Kong and Singapore in Asia and in Europe trade centres such as the German city of Hamburg. In the US Roberts points to cities such as Boston and the San Francisco Bay area as examples of cities with industries that are resilient to economic downturns.

 

The recent rally on global markets does not mean that the risk environment has abated Towers Watson’s global head of investment Carl Hess has warned.

Speaking from New York prior to the launch of the consultant’s report Global Investment Matters, Hess says that while the risk of the imminent collapse of financial markets has lessened, the world economy still faces a tough road to recovery.

“Where we have just been is the crescendo of the great debt cycle and we have kind of unwound a small amount of it but we have an awful lot to go,” Hess says.

In its annual snapshot of the world economy and predominant investment themes, Towers Watson names its 15 top risks. According to Hess, the high debt, grinding austerity and slow growth facing developed countries is reflected in the top five risks because the world economy is fragile and has little room to absorb unexpected shocks.

 

Towers Watson top 15 risks:

Rank

Risk Description

1

 Depression Debt-deflation trap; falling growth and incomes

2

 Sovereign default Default by a major developed country on its debt

3

 Hyperinflation Extremely high inflation

4

 Banking crisis Balance sheets cannot absorb another shock

5

 Currency crisis Extreme movement between floating rates

6

 Climate change Diversion of capital to mitigation uses

7

 Political crisis Rise in power of extremist groups

8

 Insurance crisis Insolvency within insurance sector

9

 Protectionism Reversal of movement towards free trade

10

 Euro break-up At least one member leaves the euro

11

 Resource scarcity Peak ‘stuff’ (such as energy, metals, food, water)

12

 Major war A major global conflict

13

 End of fiat money Return to a gold standard

14

 Infrastructure failure (Temporary) interruption of grid/networks

15

 Killer pandemic Contagious disease with very high mortality

 

The last time the global investment consultant conducted such a risk analysis was in 2009.

Since then it has dropped its more dire risks of an end to capitalism and excessive leverage, causing a collapse of the financial system.

While it has eliminated excessive leverage as a stand-alone risk, Towers Watson has detailed a number of less extreme financial-system risks that are caused by too much debt.

A number of new entrants made the new list including resource scarcity and infrastructure failure.

The risks identified focus on a 10-year window, with much of the more dire consequences associated with resource scarcity falling beyond this period.

However, Towers Watson points to the potential for price spikes in major economic outputs and increased price volatility of basic commodities as potential risks to global economic growth in the next decade.

The increased interconnectedness of societies and their dependence on modern technology has meant that the failure of key infrastructure such as an electricity grid or a computer network is also a new risk.

Towers Watson points to the likely social unrest and disruption to economies that could eventuate from such an event. The consultant says that the recent hacking of Sony Playstation customer accounts is an example of where cyber-attacks could lead to economic losses for a company and its investors.

In its assessment of what it is seeing from investors, the report notes an increased focus on asset allocation and portfolio construction, particularly under-delegation in decision-making around them.

The consultant says that funds typically are leaving the decision to their board and/or investment committee who act on advice from a consultant.

“This approach can limit access to the skills required for portfolio construction or slow the pace its skills can be applied,” the report states.

It points out a growing recognition among investors that greater resources need to be committed to portfolio construction, which is driving the growth of internal teams.

For smaller funds this could involve hiring a team via the appointment of a fiduciary manager.

“We expect funds to spend more in the future on recruiting portfolio-construction skills and less on active management,” the report forecasts

 

Delegation and all-weather insurance

In its discussion of delegation in Global Investment Matters, Towers Watson says that funds have delegated too much authority to asset managers to construct mandates.

The report goes on to say that funds can recoup much of the cost of a fiduciary manager and/or building an internal team focused on portfolio construction through achieving a more thorough approach to structuring mandates in various asset classes.

“Our experience to date has been that once a fund has recruited these resources, whether they be an internal team or a fiduciary manager, their ability to restructure some of the mandates in the alternative asset class alone can more than offset the costs of these resources,” the report states.

While investors can sleep slightly easier now that the systematic failure of financial markets is no longer the overriding concern it was last year, Hess warns that investors must think broadly about the risks still out there.

“What may have gone away is the imminent collapse of the financial system but it has been replaced by the slow rot,” Hess says.

The list of extreme risks is a way for investors to focus on what risks they see as most likely and position their portfolios accordingly.

Diversification and hedging are two predominant themes that Towers Watson has been pointing out to its clients.

Hess says that investors should be thinking about ensuring their portfolios have an all-weather effect that can deal with unexpected events.

“Really think about hedges, we are not talking about taking the whole portfolio and putting it under the mattress, but thinking about some 5, 10, 15 per cent of the portfolio might be devoted to some asset classes or themes which might flourish in these environments.”

Depending on the risk profile of the investor and the risks an investor deems most likely, this could involve a strategic allocation to cash or investing in hard assets such as gold.

“For risk that involves the breakdown of monetary systems, you will want to think about a hard asset like gold and going back to this original storehouse of value,” Hess says.

He warns against investors being overweight risk assets, saying that despite equities being attractively valued relative to bonds, the recent rally should give them pause for thought.

“Equities are not particularly cheap and they are not particularly expensive, we thought they were attractive at the beginning of the run and now they are just all right. Now is the time to think about what else can you do,” Hess says.

“There is just not necessarily all that much that looks like stark good value at the moment.”

The report recommends investors do not increase the aggregate risk level of their portfolios and instead take a neutral stance while looking for attractive relative valuations.

Investors who chose to look for opportunities in the short term through dynamic asset allocation should focus on assets with ‘high yields, good balance sheets and little exposure to European event risk’.

In dealing with fixed income and sovereign risk, Hess says the consultant has been working with asset managers to construct fixed-income indices that are do not focus on the biggest issuers of debt but rather on a debtor’s ability to repay.

“The notion of the risk-free rate seems to be dying a pretty quick death, so what we have been suggesting is within the bond portfolio do look for diversification of issuer, of currency and diversification of credits,” he says.

 

 

Tackling the 65-per-cent-funded status of the Maryland State Retirement and Pension System has resulted in the bold political move to boost employee contributions while a long-term plan to increase allocations to private markets is part of a push to hit the system’s 7.75-per-cent-return target.

The system is more than 10 per cent below the average funded level of US public pension funds and both state politicians and the system’s board have put in place programs that aim to have the system reach 80-per-cent funding by 2023.

Sam Riley speaks with the Maryland State Retirement Agency (MSRA) chief investment officer Dr Melissa Moye about how the $37.7-billion fund plans to make its return target and start the long climb back to full funding.

Moye was appointed permanently to the position of chief investment officer midway through last year. She had been acting in an interim capacity since October 2010 after previous CIO Mansco Perry III left to head up the endowment fund of Macalester College in Saint Paul, Minnesota.

After a nation-wide search for a candidate, the system’s board decided to stick with Moye on the back of a 20-per-cent return last financial year.

Moye has inherited a long-term asset allocation from the board that has set a course to increase the fund’s exposure to private markets in an effort to further diversify the portfolio and decrease its overall volatility (see figure).

 

A state apart

But in a move that sets itself apart from many other states, Maryland Governor Martin O’Malley agreed to stick with the defined-benefit structure of the system when designing a reform program to address funding levels.

While other states such as California are considering hybrid defined contribution/benefit systems, O’Malley and the state’s legislature passed reforms last year that seek to share the burden of providing for public pensions.

At 65-per-cent funded, the Maryland system lags behind the average funding levels of its peers by more than 10 per cent.

A National Conference on Public Employee Retirement Systems (NCPERS) study released in mid-2011 found that US public pension funds were, on average, 75.7-per-cent funded.

While state politicians have maintained the defined benefit system, this has been balanced by an increase to employer contributions from 5 to 7 per cent and cutting back on cost-of-living increases when calculating benefits.

The system manages benefits for approximately 350,000 public employees.

According to the National Association of State Retirement Administrators, Maryland state and local governments contributed 2.79 per cent of the total state budget in 2009 compared to a national average of 3 per cent.

Investments also form a vital part of the plan to return the system to full funding in the long term.

Before the financial crisis the MSRA board decided to significantly increase its exposure to private equity, ultimately to 10 per cent of the total fund as a long-term target.

The current allocation to private equity is 4 per cent.

The decision to move more into private markets came before the fund experienced a more than 20 per cent loss in the 2009 financial year. This loss resulted in funding levels dropping from 78.62 per cent to 65.02 per cent.

The board has expressed a desire to limit the volatility of the portfolio through increased diversification into private markets, real return assets, property and hedge funds.

This increased allocation to private markets is to come predominately from the public equity portfolio, which currently accounts for 47 per cent of the overall portfolio.

Moye says the board plans to reduce its exposure to public equity to 36 per cent of overall fund.

The private markets push also reflects advice from MSRA investment consultant Hewitt EnnisKnupp, which identified the fund’s then 2-per-cent-private-equity allocation as underweight relative to other public pension funds.

“In terms of private equity, we were really under-allocated relative to our peers, at roughly 2 per cent of our total plan, and what we are seeing is that, in fact, there is potential for return in private equity, as a balanced part of the portfolio,” Moye says.

Hewitt EnnisKnupp is also a consultant to the Teachers Retirement System of Texas, which has been one of the most aggressive of the public pension funds in allocating more to alternative assets.

In a February 2011 study, Wilshire Associates found that US public pension funds had an average allocation to private equity of 8.8 per cent.

The public equity portfolio is constructed to limit home-country bias.

“We keep the portfolio balanced to the MSCI All Country World index, so in other words it is really a global allocation,” she says.

This typically sees the funds split 44-per-cent US equities to 56-per-cent international.

SRA has a team of 20 investment and accounting staff but all of the system’s assets are externally managed.

The board has committed to a gradual transition to private markets. Capital that is currently unallocated to private equity is temporarily allocated to public equity.

 

Opportunities in diversity

The diversification push also includes an increased allocation to real estate and credit/debt to 10 per cent of the fund respectively.

Distressed debt opportunities offer attractive opportunities at this stage of the market cycle, Moye says.

“The credit/debt push came after the global financial crisis as it made sense to provide credit as a way of getting equity-like returns with lower risk,” she says.

“We see private markets as part of the overall opportunity set for institutional investors.”

Moye says that the board has also looked to position the portfolio to deal with what it sees as a long-term risk of inflation.

Subsequently, it has increased target allocations to the real-return asset class. This asset bucket is currently 10 per cent of the portfolio and includes real assets such as timberland, infrastructure, Treasury Inflation Protected Securities (TIPS), global inflation-linked bonds, commodities and energy, and energy-related assets.

According to Moye, the fixed-income and real-return assets currently make up 30 per cent of the portfolio. The board has set a target allocation of real returns and fixed income combined at 25 per cent of the total fund once real estate reaches its 10 per cent target from its current level of just over 5 per cent.

 

Inflation, commingling and outsourcing

“Most investors are concerned about inflation in the longer term and over time we will move more assets to inflation-protected type of assets, and real assets like timber and infrastructure that have capacity to increase returns with inflation,” she says.

MSRA assumes a 3 per cent rate of inflation in its actuarial assumptions and its investment team is planning for potentially higher inflation in the next decade.

The fund has decided to wind up its direct investment program in property, preferring commingled funds as a way of increasing the diversity of its holdings.

In December the investment division of the Maryland State Retirement Agency, SRA, closed its 20-year direct-equity real-estate program, selling its last three Maryland properties.

At the time Moye said that commingled funds offered greater diversification across property types and geography.

The fund has also gone for a new consultant for its absolute-returns portfolio, appointing Albourne America at the start of this year.

Absolute returns are capped at 15 per cent of the portfolio and currently make up around 9 per cent of total assets. Albourne will look at the portfolio construction as well as due diligence of managers, and ongoing operational due diligence.

The absolute returns portfolio achieved an 8.54-per-cent return last year, beating its benchmark.

The push into private markets comes as the fund has also maintained its assumed rate of return of 7.75 per cent.

The National Association of State Retirement Administrators (NASRA) found last year that 56 of the 126 state pension plans it surveyed had an assumed rate of return of 8 per cent.

The NASRA research also found that all of these plans’ return assumptions fell within a range of 7 to 8.5 per cent.

While the largest US public pension fund, CalPERS, has decided to cut its assumed rate from 7.75 per cent to 7.5 per cent, Moye says that the system’s long-term performance shows it can achieve its current return target.

“It [the rate of return] is in the range of what can be expected, given the asset allocation that we have. We receive an annual evaluation from both our general consultant and our actuary,” she says.

Moye points to the long-term performance of the system, saying it has achieved average returns of 5.65 per cent over the past 10 years, 7.64 per cent over 20 years and 8.55 per cent over 25 years.

Last year Wilshire Associates forecast a median return of 6.5 per cent for public pension funds in the long-term.

Along with its core mandates, the system has an innovative small-manager program, named Terra Maria.

The program grew out of an emerging manager program and targets smaller managers with under $10 billion in assets under management.

The system currently allocates $3.3 billion, or 8.8 per cent, of total assets to the program, as of June 30 last year.

The Terra Maria program was originally started in 2008 for public market managers., In 2010 it was decided to expand the program to include private managers.

The program returned 29.6 per cent for the last fiscal year, compared to the custom benchmark’s 30.1 per cent.

In public markets it has seven “program managers, who are effectively an extension of the investment team, as they are responsible for sourcing managers, due diligence and monitoring”.

Final manager selection and termination rests with the chief investment officer.

Figure 1: Asset allocation (June 30, 2011)

Return to top

Three funds find effective ways to get better value from staff, co-investment and private markets.

The Danish ATP, Australian Sunsuper and the Teachers Retirement System of Texas are among the funds looking at innovative ways to extract value and interact with the managers of their private equity allocations.

Institutional investors are increasingly seeking new ways to extract value from their private equity holdings, including forays into emerging markets, direct investing and innovative investment vehicles.

One fund that has taken an innovative approach to accessing the asset class is Denmark’s ATP, which utilises an innovative incentive structure that attempts to deal with some of the pitfalls of fund-of-funds models.

The problem of fees-on-top-of-fees, where investors are paying fees to both underlying managers and the fund-of-funds manager, has been a common criticism of these types of vehicles.

In 2000 the fund took the view that it should expand its private market program and decided to launch ATP Private Equity Partners (PEP).

“If ATP had invested their entire private equity program with external fund-of-funds managers, you could say that their returns would have been impacted by another layer of fees. As we are managing our business in a very cost-effective way, this is not the case,” ATP PEP managing partner, Torben Vangstrup says.

“If they had committed to a fund-of-fund manager, they would have had to pay annual management fees in the range of 0.25 to 0.8 per cent and that will have an impact if they do so for 10 or 15 years.”

 

Staff incentive schemes

ATP PEP manages four funds for ATP, and has €7 billion under management. Funds are typically €1 billion to €1.5 billion in size. ATP has targeted a 7-per-cent allocation to private equity and currently has 5.5 per cent of its overall portfolio allocated to the asset class.

The key difference between ATP PEP and typical in-house private-equity team or a fund-of-funds manager can be found in the incentive scheme offered to staff, according to managing partner Torben Vangstrup.

“We wanted a program in place so we could incentivise people for doing a great job, but also to give us an opportunity to attract and retain the right people,” Vangstrup says.

“The incentive structure we have put in place is very much like what you see in those funds where we invest. In general, many pension funds do not want or have the capability for this type of incentive system.”

A key problem for funds looking to build out internal-asset teams is the retention of talented staff. Pension funds, which must strictly control costs, often cannot compete with the generous bonuses paid by private-equity firms in the private sector.

ATP requires all partners at ATP PEP to invest their own funds in any investment the pension fund makes.

Under the carry program, when all the capital drawn down has been returned to ATP, including an 8-to-10-per-cent-hurdle rate, further distributions are shared between ATP PEP, other general partners and ATP.

“But this split is not even close to the typical 80/20 carry split in the private-equity industry,” Vangstrup says.

While it is voluntary for non-partner staff to invest in the scheme, the entire team currently participates. Its first fund has achieved an internal rate of return net of fees of 15.8 per cent since inception.

“The beauty of the system is that you will only be rewarded if and when you have been able to create excess returns for investors,” he says.

One key difference to other private equity managers is that you will not see ATP PEP partners walking away with headline-grabbing bonuses. Total remuneration from the carry program is capped.

“If you look at a traditional buyout fund there is no limit in terms of how much they can get, when they have a homerun they can get extremely rich from such a carry system,’ he says.

“We can’t, because we are part of a pension fund, we can get rich but we can’t get very rich because the carry program is capped.”

 

Co-investment can count

Since inception the fund has also looked to invest up to 10 per cent of any of its four funds in co-investment opportunities.

In a study released this month, research firm Preqin finds the appetite for co-investment opportunities was strongest among investors with sizeable allocations to private equity, with 66 per cent of LPs with allocations of more than $250 million looking to pursue such opportunities.

“Co-investments are where we invest directly into companies, typically with one of our existing buyout-fund managers, and that has been something we have been doing very successfully since our first fund,” Vangstrup says.

Preqin’s study reveals that 61 per cent of LPs it interviewed would use allocations to co-invest from their existing private-equity-fund allocation, with about the same proportion doing so on an opportunistic basis.

More than half of investors listed better returns and lower fees as the reason for seeking out co-investment opportunities.

Co-investments form part of the $19.8-billion Australian superannuation fund SunSuper’s private equity strategy, which includes using the secondary market and going directly into funds.

SunSuper chief investment officer, David Hartley, says the lower fees are an attractive aspect of this form of investment.

“The J curve, which is often put forward as a feature of this type of asset class, you actually find it’s a lot less significant when you buy secondaries or go into co-investments. In a lot of cases you can do co-investments at zero fee,” he says.

The fund invests 7 per cent of its balanced fund into what it describes as private capital, which includes equity as well as debt opportunities.

Large managers such as Apollo Global Management have looked at various private-equity strategies being more attractive during different market cycles.

In a recent presentation to the Teachers Retirement System of Texas (TRS), Apollo co-founder Leon Black told trustees that distressed debt, rather than buyout opportunities, represented a compelling opportunity in this current market environment.

It is a view shared by Hartley, who has upped its allocation to private debt recently.

“We are heading to 15 to 30 per cent of the portfolio in debt and the rest is in equity-type investments. But if the situation continues where we think we can get better returns versus risk for debt, that will increase over time, but we don’t necessarily expect that this will always be the case,” Hartley says.

SunSuper has achieved a net internal rate of return of 10 per cent above the listed market alternative since the inception of its private equity program in 1995. It aims for 5 per cent above the MSCI World index.

Both SunSuper and ATP have diversified their private-equity holdings beyond their domestic markets.

Emerging markets now make up 10 per cent of ATP PEP’s fourth fund, while SunSuper has a 7 per cent allocation to Asia.

 

Private markets pay, too

Cambridge Associates Australian managing director Eugene Snyman says that private markets are an increasingly popular way for investors to play the growth story in emerging markets.

While public markets in emerging markets can be dominated by large companies in the finance, mining and energy sectors, private investment gives exposure to fast growing consumer-based and technology sectors, Snyman says.

“The return enhancement is what draws investments to private equity but it is that additional diversification that also draws them to the asset class,” he says.

“That is true for the Indian and Chinese market where a lot of our clients have been wanting to gain exposure to the growing middle class. But if you are just playing the public-market exposure to those markets, the cap-weight exposure you are going to get puts you into the largest companies that are ultimately selling to the US and European consumers.”

Ralph Jaeger, managing director at Siguler Guff’s Boston office, says that as investors have looked at their private-equity holdings since the global financial crisis, they have found that emerging markets have been one of the strongest portfolio performers.

“When it comes to the risk profile in emerging markets, there is a misconception. There is less – significantly less – volatility in emerging-market private equity than in emerging-market public markets,’ he says.

“Emerging-market private equity has also significantly outperformed emerging-market public markets since around 2003. What we also see is that it has been very resilient from a performance point of view in the global financial crisis [when] compared to emerging-market public equities.”

Cambridge Associates research shows that since 2006, emerging-market private equity and venture capital has an annual compounded premium of 1000 basis points.

Emerging-market private equity and venture capital is also consistently approximately half that of the MSCI EM index volatility, Cambridge finds.