New research reveals strong focus on increasing allocations for diversification
The potential returns and hedging factors of private markets, as identified by advisors, continues to attract the attention of portfolio managers at global institutional investors.
A new survey of 800 institutions managing a total US$19 trillion AUM reveals that two thirds plan to increase allocations to private markets in the next five years with 90% already holding private equity and private credit, double the level just four years ago.
The Nuveen study found that private infrastructure and private real estate are in focus for PMs, with these two asset classes showing the largest year-over-year jump in planned allocation hikes. Two thirds are planning to increase allocations to real estate related to digital infrastructure amid the fast rise of AI and cloud computing.
Harriet Steel, global head of Institutional at Nuveen, sees three main themes emerging in the data.
"First, investors are considering ways to play the next real estate cycle; second, private markets will play an expanded role in portfolio construction with nearly 40% of investors seeking out a broader selection of asset managers to help grow these allocations; and third, among the insurance cohort – a client segment with a unique set of challenges and objectives – respondents indicated both a greater appetite for complexity and specialization within private markets compared to last year and a greater focus on impact investing compared to other investors."
Nearly half of investors planning to expand allocations to private infrastructure, credit and equity, with private equity where they plan to make the greatest increase.
The research reveals an emerging trend toward higher-yield, higher-risk fixed income with private fixed income now a leading focus, and almost half of respondents are exploring new niche areas within private credit, such as energy infrastructure credit and fund finance.
Almost 40% of institutions are expanding their roster of asset managers to navigate increasing complexity and specialization.
But the report also found that institutions are challenged by balancing climate risk with better returns. Around three quarters of respondents say that both traditional and renewable energy sources are required to be part of meeting near-term energy needs.
"We are seeing a shift toward strategies that combine the practicalities of current energy needs with the ambitions of a sustainable future," said Steel.
