New study confirms institutional craving for private assets
Allocation to private assets is first a portfolio diversifier then a generator of higher returns on the long run. The view sums up the sentiment of European, Middle-East and African as well of Latin American institutional investors when surveyed by British investment manager Schroders on their reasons to invest in private assets. For North American and Asian investors, the opposite is true. Higher returns first, portfolio diversification second.
Schroders commissioned CoreData to carry out its fourth annual institutional investors study. As part of the research, the 650 global institutional investors surveyed, managing $25.9trn in assets collectively, were interviewed about their investment relationship to private assets. Their average allocation to the segment in 2020 was 14%, arising from 12% in 2019 and 2018. Institutional investors identified private equity (37%), infrastructure equity (29%) and private debt (28%) as the asset classes where they expect their biggest increase in private assets allocation over the next three years.
Furthermore, some 21% of the respondents expect to increase allocation to real estate over the same period, 12% to real estate debt and infrastructure debt, and 7% to insurance-linked securities. On average, almost one in four institutional investors (24%) globally stated to Schroders that they would not increase their allocations over the next three years to any private asset class.
'Conservative' net return expectations
EMEA investors expect the largest private assets’ allocation rise by 2023 to occur in infrastructure equity (33%) then private equity (28%) and private debt (25%). “Unlike in the other geographies, EMEA's highest expected increase in asset class allocation is to infrastructure equity. Given the strength of the mid-equity market for core infrastructure in Europe, it's no surprise that institutional investors are turning their interest towards long-term investments that focus on predictable cashflows, sustainability and protection from inflation,” outlined Georg Wunderlin, global head of private assets at Schroders.
As for net return expectations across private assets for the coming 12 months, the largest bucket of institutional investors believe that these will not exceed 5% for each sub-private asset class. Nevertheless, the study’s findings suggest investor optimism regarding private equity returns. Indeed, 21% of the respondents forecasted that their allocation to private equity will deliver more than 10% of their net returns over the next 12 months. Lower expectations are placed on real estate and infrastructure debt with 43% of institutional investors expecting to generate up to 5% of their net returns from both asset classes.
Schroders’ research highlighted that investment philosophy tops criteria in private asset manager selection among EMEA institutional investors (66%) before performance track record (63%) as well as fees and terms and conditions (48%). Conversely, performance track record matters more in the Americas and Asian investors tend to look first into fees and terms and conditions. EMEA investors also monitor closely the depth of environmental, social and governance capability of private asset managers (20%). The British investment manager found out a similar trend among Asian investors (19%) but not among investors from Americas (8%).
Same old concerns
Like in 2019, the surveyed institutional investors continued to express the most concerns around high valuations, lack of transparency and high fees in private asset investments. “We’ve seen the largest decreases in concerns around default failure (44% in 2019 vs 39% in 2020) and lack of transparency (57% in 2019 vs 52% in 2020),” pinpointed Schroders. Regarding hurdles in private asset investments, institutional investors globally cited fees and liquidity (56% each) followed by complexity (47%). In the EMEA region however, liquidity issues are viewed as the main obstacle.
“Concerns around fees and transparency have long been a blockage for investors allocating larger portions of their portfolio to private assets. Liquidity as a concern to investors is another point that comes as no surprise. It is clear that LPs are sending a message that the industry needs to address. Let’s not forget however, that illiquidity and long lock-ups are the defining characteristics for private assets allowing for control, impact, effective crisis management and ultimately superior value creation,” Schroders’ private assets global head Wunderlin commented.