State Street survey finds global institutional investors favour private markets but will keep powder dry for the right opportunities
Expect interest in private markets by global institutional investors to continue its upward path as opportunities become increasingly attractive.
And retail investors should also be considering how investing in private markets could help them diversify their portfolios according to a global poll of investors including traditional asset managers, private market managers, insurance companies and asset owners across North America, Latin America, Europe and Asia-Pacific.
The poll comes ahead of a Wealth Professional webinar where asset managers and thought leaders will unpack the hows and whys of alternatives.
Seven in ten respondents to the State Street survey plan to boost their allocations to private markets in line with their current targets.
However, they acknowledge that interest rate hikes have made highly-leveraged assets less attractive – for now.
Private equity remains the leading focus for these large investors with almost two thirds (63%) expecting it to be their largest allocation in the next 2-3 years.
Real estate and infrastructure (both 48%) are next in line while private credit (43%) is the least attractive. Deal quality is paramount for all investments.
Paul Fleming, head of the Global Alternatives Segment for State Street, says that private markets remain extremely attractive, even though the tailwinds of the last decade may be gone.
"Our survey finds that three quarters of respondents believe tougher economic conditions will create discounted opportunities, but investors are likely to bide their time, as at least half feel valuations have not yet fully adjusted. Dry powder will become invaluable in the next couple of years."
Retail investors
Asked whether alternative assets can add value for retail investors who are seeking new sources of diversification, two thirds of respondents said yes.
More than 7 in 10 said that private market assets would be more attractive for retail investors as transparency improves and almost 6 in 10 think digital fractionalization of private markets assets would contribute to this trend.
"Private market managers are quite bullish on tokenization going mainstream in the next three plus years, as they look to widen their investor base," continued Fleming. "However, democratization will place fresh demands on private market managers from a regulatory and transparency perspective. The majority of managers believe regulators will be compelled to introduce more stringent reporting requirements as retail participation rises. It is critical for private managers to enhance their data management, which will help them reach the next stage in their growth."
Data challenge
Assessing the value of investments is taking considerable time and resources of institutional investors.
The poll found that more than half use manual processes and outdated systems and while data analytics is seen as key to making better decisions, just 40% of respondents felt this is well developed within their organization.
"There are strong imperatives for private market investors to address operational inefficiency and data management limitations as higher borrowing costs and a rising compliance burden squeeze margins. A volatile economic backdrop also puts added emphasis on risk management," said Jesse Cole, global head of Private Markets at State Street. "On top of creating efficiencies, many investors also believe that data management and analysis capabilities are a source of competitive advantage and managers need highly structured data management processes in order to maximize returns."
