The vast majority of investors plan to increase their private assets exposures over the next 12 months amid a growing focus on the benefits of diversification, Schroders Institutional Investor Study 2021* has found. Schroders flagship annual institutional study, first launched in 2017 encompassing 750 investors and $26.8 trillion in assets spanning 26 locations, found that 90% of investors are aiming to increase their allocations in one or more private assets classes over the coming year.
The growing importance of private assets was further emphasised by 47% of investors stating they will continue to diversify into alternatives and private markets and reduce their listed exposures, driven by the economic and financial impact of the pandemic. This was almost double the proportion of investors polled last year.
Over a third (37%) of investors also said that the impact of the pandemic had increased the importance of ESG considerations, with 54% citing that ESG strategies which have a ‘benefit all stakeholders’ principle at the heart of their investment process are the most appealing.
A resounding 80% of investors said the need to diversify portfolios was driving their private assets allocations, up on 78% a year ago and the 73% polled in 2019.
Track record and team stability, as well as the quality and transparency of reporting were the most important factors cited by investors when it came to selecting private assets managers. Investors in Latin America also placed a far greater emphasis on the ability to meet local requirements, compared with their global peers.
“Private assets continue to take a greater share of institutional portfolios. What is encouraging is the emergence of signs that the versatility within private markets is being recognised. However, while it is clear that institutional investors value real diversification highly, we think the variety and consistency of diversification within private assets may actually be underestimated.
“The opportunity is not only to diversify across publicly listed and private investments, but also to diversify within private assets. By combining different private asset classes investors can get exposure to very different return, risk and liquidity profiles and also make use of different underlying macroeconomic and industry-specific return drivers.
“Private markets are incredibly nuanced. They offer not only a wider range of risks, such as complexity- or illiquidity-based premia than many investors realise, but a huge number of private assets focused investment solutions can be tailored depending on investors’ preferences. A growing number of our clients are taking advantage of this potential as we remain focused on working in partnership with them to meet their evolving needs amid the ongoing challenges of the pandemic and broader market uncertainties.”Georg Wunderlin, Global Head of Private Assets, Schroders Capital
“It is clear that institutional investors have a significant demand for investment strategies working to foster positive change.
“What’s more, Covid-19 has indicated the importance of providing financing in real time to the core sectors of the economy. It has also shown how vital the combination of public and private resources is at times of crisis, when financing needs are overwhelming and the funding from the private sector alone would not suffice.
“Private debt in emerging and frontier markets also proved crucial, with dedicated initiatives targeting the sectors and regions most impacted by the pandemic.”Maria Teresa Zappia, Chief Impact and Blended Finance Officer and Deputy CEO of BlueOrchard
Globally, private equity was the stand-out asset class for future allocations, with 37% of investors expecting to build their allocations, following by infrastructure equity (32%) and impact investing (29%).
Specifically, investors in Asia Pacific and North America were prioritising private equity, with the majority of investors in Europe looking to grow their allocations to infrastructure equity. In Latin America, corporate private debt was the stand-out asset class.
Concerns that investment fees were too high, a lack of transparency and high valuations were the main obstacles investors cited when it came to investing in private assets.
However, it is important to note that when asked about the challenges, illiquidity (42%) and complexity of the asset class (35%) did not feature among investors’ key challenges.
This may suggest that investors are now recognising that illiquidity and long lock-ups, whilst a concern, are also a key reason to invest in private assets.