The rotation from public to private assets within institutional investor portfolios will grow further in the coming years, according to new research.
State Street has found that more than a third of investors (36%) have already allocated at least half of their portfolio to alternative assets. This figure is set to hit 41% of institutional investors within five years.
Furthermore, most (59%) have already allocated 30% or more to private markets, and this is expected to reach 71% by 2028.
These were the main findings of State Street’s third annual private markets survey which explores the allocation plans of asset owners, asset managers, private market managers and insurers across North America, Latin America, Europe and Asia-Pacific.
Infrastructure and private debt are the most attractive asset classes, with 71% of institutional investors intending to increase their exposure to each during the next two years.
However, longer-term private equity is set to return to favour, with almost three quarters (73%) of respondents planning to allocate more of their capital to the asset class in the next three to five years.
Investors intend to reduce their allocation in public markets to meet increased demand for private exposures.
“The great rotation from public to private markets is not slowing down, with investors set to allocate more to private assets than ever before,” said Donna Milrod, executive vice president and chief product officer at State Street.
“This increasingly sophisticated private market universe means the current economic environment, coupled with investors’ desire for wider, more diverse avenues of capital, is making private markets attractive now and for the foreseeable future,” she added.
Challenging conditions
In addition, most respondents (61%) believe that inflation has peaked in their local markets but will not fall back within their central banks’ target range during the next two years.
For most respondents (58%), macro challenges are making fundraising difficult, which is leading to delays of three months to a year or more.
In response, investors are increasing their diversification, investment in risk management and reducing risk exposure.
Indeed, 43% are exploring fresh market niches, 38% are enhancing their risk management processes, while 34% are reducing risk to protect against downside.
“Overall, while demand for private market assets continues to grow, investors are also experiencing a tightening supply of quality deals and express that borrowing costs can be an issue for them,” said Scott Carpenter, global head of private markets and credit at State Street.
“Central bank decisions on rates and the state of inflation will heavily influence opportunities and investing behaviours over the next couple of years,” he added.
And ESG issues will continue to come to the forefront for private markets participants in 2024, according to S&P Global Market Intelligence.
In the EU, for example, more companies will come under the scope of the Corporate Sustainability Reporting Directive.
As with so many other aspects of private markets, it is regulation that is pushing the ESG envelope, S&P said.
Although ESG is not only a regulatory imperative, with asset managers also viewing it as an opportunity to create value across a variety of business metrics.
AI innovation
And according to State Street, risk measurement and management, liquidity management and the ability to forecast future and capital pacing are among the top operational challenges institutions face when investing in private markets.
Almost 80% of investors are looking for a centralised, accessible platform for public and private asset data, as the lack of availability, accuracy and timeliness of data is an overlooked aspect of private markets.
However, advancements in AI have the potential to improve private market operations significantly.
Almost half of respondents (43%) globally believe that machine learning has the potential to enhance private markets operations, while most (58%) believe that generative AI will enhance operations.
“AI excitement from institutional investors is driven by the industry’s historic deficiencies in quality private market data,” Milrod added.
“Subpar access to quality data is a major impediment that stands in the way of a firm’s ability to view and assess public and private assets data in one place. As we speak with clients, it is clear AI has the potential to hugely improve this aspect of the market.”
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