Report Maps Global Progress Of Alternative Investment

Investors Offshore.com, London

16 January 2002

At the end of 2001, Goldman, Sachs & Co. and the Frank Russell Company announced the publication of their fifth global report on alternative investing by tax-exempt institutions (public and corporate pension funds, endowments and foundations) in North America, Continental Europe, the United Kingdom, Australia, and Japan. This is the first time Japan has been included in the report.

According to the report, over the past decade, institutional investors have increasingly turned to alternative investments in an attempt to boost excess returns for their investment portfolios. Private equity is now included in many of the world's largest institutional portfolios. Since the first survey in 1992, the level of commitment to alternative investments has continued to grow across all regions.

Major findings include:

• In North America (Canada and the U.S.) and Europe, alternative investment commitments increased substantially. Total assets committed to private equity by survey respondents increased from US$169 billion in 1999 to over US$246 billion this year. North American assets increased from US$152 billion to US$220 billion; while in the United Kingdom and Europe, where more institutions were surveyed in 2001 than in 1999, assets rose from US$14 billion (Euros 13.4 billion) to US$23 billion (Euros 26.7 billion). Australian private equity assets rose slightly. Japanese respondents, surveyed for the first time this year, reported private equity assets of US$133 million.
• Average strategic allocations to private equity continue to grow from 1999 levels in all regions, though the rate of increase has slowed in North America and Australia: 7.5% of total fund assets for North America (up from 7.3%), 3.6% for the UK and Continental Europe (up from 2.5%) and 6.5% for Australia (up from 6.3%).
  Further increases in strategic allocations to private equity are anticipated in all regions by 2003. European respondents expect their strategic allocations to grow from 3.6% to 4.3%. In North America, the 2003 allocation is projected to be 8.1%, up from 7.5% in 2001. Australian respondents expect their allocation to private equity to grow to 7.2% by 2003, up from 6.5% in 2001.
• Leveraged Buyout Funds have attracted the largest share of private equity commitments in all regions except Japan, where venture capital funds are favored by the small investor base. In North America, LBOs attract 50% of all private equity commitments and are most popular among the largest funds, while venture capital is most popular with endowments and foundations and mid-sized funds.
• Investing outside the home country or region continues to gain in popularity. North American respondents reported having 17% of their private equity commitments invested abroad, predominantly in Western Europe, up from 14% in 1999. UK respondents are now investing increasing amounts in North America, moving away from the predominantly Western European orientation reported in 1999. Continental European respondents, who are more diversified internationally than their peers in the UK, reported trimming their North American exposure in favor of other foreign markets and global fund commitments.
• Hedge funds are currently more popular with Japanese respondents than private equity. Of the 44 survey respondents in Japan, only 3 reported commitments to private equity for a total of US$133 million, whereas 13 had commitments to hedge funds totaling US$665 million.
• In regions other than Japan, hedge funds account for a more modest share of alternative assets. North American and European commitments to hedge funds stand at US$12 billion and US$2 billion, respectively. Most respondents showed an interest in hedge funds, with a number indicating they were exploring the asset class and expected to invest in it in the next two years. However, the complexity of the asset class may be daunting to some investors. Differing levels of experience may explain different levels of commitment. For example, 74% of hedge fund investments in North American respondents' portfolios are sourced from endowments and foundations, with the remainder from pension funds. A number of respondents reported making small commitments to hedge funds for research purposes, even though they do not have a formal strategic allocation in place. As investors develop more familiarity with hedge funds, we expect that strategic allocations will rise.
  

"It is clear from the 2001 survey results that while alternative investments continue to be an important and growing component of institutional investment portfolios in the U.S. and Canada, institutions in other countries are now beginning to take greater advantage of the benefits provided by this asset class," said Karen Seitz, Managing Director at Goldman Sachs.

Sounding a note of caution, Hal Strong, Managing Director at Frank Russell Capital, Russell's alternative investment subsidiary, added that, "Allocations to private equity have grown in the US, but the pace of this growth is now slowing. However, we are seeing more meaningful increases in allocations particularly in the UK and we expect this trend to continue."

Since its inception in 1992, the Goldman/Russell Report on Alternative Investing has been an important tool for institutional investors in alternative investments — becoming a barometer for industry standards and investment levels. Published biennially and jointly by Goldman Sachs and Frank Russell Company, the report helps investors to broaden their knowledge about industry best practices, to stay abreast of trends and to structure their alternative investment commitments intelligently. The 2001 Report focuses on determining, on a percentage basis, the types of alternative investments that are being used by investors, particularly the growth and composition of these investments, as well as geographic diversification.

The survey target list covers pension funds and foundations and endowments with assets of US$3 billion or more. The survey is given in an objective format and respondents are asked about their views and methodologies concerning alternative investments. The 2001 survey results are based on the detailed information provided by 346 organizations in North America, Europe, Australia and Japan. The survey universe was expanded this year to include Japanese pension plans.

Frank Russell Company, a global investment services firm, provides manager-of-manager investment products and services in more than 35 countries. Russell manages $66 billion in assets and advises clients representing more than US$1 trillion worldwide. Founded in 1936, Russell is a subsidiary of Northwestern Mutual and is headquartered in Tacoma, Wash., with additional offices in New York, Toronto, London, Paris, Amsterdam, Johannesburg, Singapore, Sydney, Auckland and Tokyo.

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