UK – Institutional investors’ appetite for private equity as an asset class is increasing, according to a survey by KPMG’s private equity group, and the fund of funds sector could be first in line to take advantage.

The survey, which interviewed investors managing a combined 700 billion pounds (1.06 trillion euros), in assets revealed 66% to expect the number of funds allocating to private equity to increase over the next few years, and 80% to expect the total amount allocated to each fund to increase.

Commenting on the report, Oliver Tant, head of private equity at KPMG, said: “This represents an important step for the growth of the private equity sector in Europe. The funds that are in PE want more of it, and the ones that aren’t want in.

“Private equity is an attractive asset class in its own right, but it is also benefiting at the expense of quoted equities - this would appear to be as a result of the turmoil in the public markets. PE is now an established alternative investment class and the developments of the next few years are likely to be symptomatic of a maturing sector.”

Investors still have concerns though when allocating to private equity. Lack of liquidity of private equity investment and a perception of a higher level of risk has resulted in investors expecting returns of typically 400 to 500 basis points, says KPMG.

Factors that discourage investors also include concerns about fee structures, belief that there is a lack of performance transparency, and that governance costs are perceived as being higher than in other asset classes.

Tant believes that the challenge will be to make the asset class better understood and easier to administer. “The overriding concern of investors appears to be identifying the best funds.”

A detailed knowledge and understanding of the asset class is believed to confer an advantage to experienced and well-established investors who are able to leverage their inside knowledge to select the best PE managers. This would appear to provide strong encouragement for the fund of funds sector and those established players within it, says KPMG.

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