(London) – Almost three-quarters (73 per cent) of global institutional investors expect Private Markets investments to outperform Public Markets over the next five years, according to the seventh Private Markets Study published by Aviva Investors.
Institutional investors expect Private Markets to outperform public markets over five years
- More than half of institutional investors expect to increase Private Markets allocations over next two years
- 56 per cent now allocate ten per cent or more of their portfolios to Private Markets
- Illiquidity premium expected to become increasingly important reason for allocating in the next two years
The annual research, conducted in September and October 2024, captures responses from 500 institutional investors, including corporate DB and DC pension plans, public and government pensions, insurers and financial institutions in Europe, North America and Asia, which together represent combined assets of US$4.3 trillion.
Whilst ‘Diversification’ was highlighted by most respondents (70 per cent) as their main reason for allocating to Private Markets today, the ability of these assets to provide an illiquidity premium is expected to become an increasingly important characteristic. 47 per cent of investors expressed this as being a key reason for allocating to Private Markets assets in the next two years versus 40 per cent today.
The Study also highlights institutional investors continuing to bolster their Private Markets portfolios, with 51 per cent expecting to increase allocations over the next 24 months. Of the three regions surveyed, European investors were most likely to be considering an increased allocation to Private Markets assets (57 per cent), compared to 47 per cent in North America and 44 per cent in Asia-Pacific.
David Hedalen, Head of Private Markets Research at Aviva Investors, said:
“The illiquidity premium is emerging as a driving force behind the trend towards Private Markets, and investors are recognising it as a reason to increase their allocations to these strategies. Investors have had to adapt to changing market conditions over the last 12 months. Despite this, allocations to Private Markets have continued to trend upwards. It suggests a recognition of these asset classes to deliver across various stages of the investment cycle and offer diversification from public markets.”
Globally, Private Markets assets now account for 11.5 per cent of institutional investor portfolios, up from 10.5 per cent last year. Whilst allocations to Private Markets in North America were almost unchanged, the region remains the biggest investor in Private Markets globally by proportion, with 12.4 per cent of portfolios allocated to such strategies, compared to 11.5 per cent in Asia-Pacific and 11.1 per cent in Europe.
The share of respondents who allocate ten per cent or more of their portfolios to Private Markets has also grown to 56 per cent, rising from 48 per cent previously. Breaking down respondents by investor type, official institutions, including central banks and sovereign wealth funds, have the largest allocations to Private Markets at just over 15 per cent of portfolios. This is followed by corporate DC pension plans (12.4 per cent) and public pension plans (12.3 per cent).
The Study also showed broad agreement on the asset classes expected to deliver the strongest risk-adjusted returns over the next five years, with equities-based strategies dominating investors’ views. 60 per cent of respondents globally highlighted real estate equity as the asset class they are most bullish on, with private equity (58 per cent) and infrastructure equity (54 per cent) rounding off the top three.
David Hedalen commented:
“The consensus that equity-based asset classes are those expected to deliver strongest-risk adjusted returns over the next five years comes despite the current interest rate environment creating a backdrop of elevated all-in yields for debt. We think this is a prudent view, with the market having entered a new phase where valuations are stabilising and liquidity is returning. With discerning asset selection, investors able to allocate into this part of the cycle should be able to look forward with confidence.”
In North America, risk and return considerations were considered the most appealing factors for investing in Nature-Based Solutions, with ‘investment return potential’ (89 per cent) and ‘portfolio diversification’ (82 per cent), suggesting a pragmatic approach to the asset class. Institutional investors based in Europe were equally drawn to the financial and non-financial considerations, with ‘portfolio diversification’ considered to be the primary appeal of nature-based solutions (79 per cent), followed by ‘the opportunity to offset carbon emissions’ (76 per cent), ‘investment return potential’ (73 per cent), and ‘contributing to the preservation of nature’ (72 per cent). Asia-Pacific more closely reflected Europe, where ‘portfolio diversification’ was the most cited answer (85 per cent), followed by ‘investment return potential’ (74 per cent), ‘contributing to the preservation of nature’ (73 per cent), and ‘offsetting carbon emissions’ (69 per cent).
The incorporation of sustainability continues to grow, with three quarters of investors globally now considering it as either a critical factor or one of several factors in investment decisions, up from two-thirds in 2023. Net zero also continued to be a focus for global institutional investors, with the Study showing an increase in the proportion of respondents from across all regions having some form of commitment in place to reach net zero emissions. 65 per cent of respondents globally cite their organisation as having a commitment in place. Institutional investors in Europe were most likely to have a commitment in place (74 per cent), followed by those in Asia-Pacific (63 per cent) and North America (42 per cent).
Globally, 76 per cent of investors identified ‘technological advances’ as being the top structural theme they expect to create the most significant opportunities in Private Markets over the next decade. This was followed by ‘demographic shifts’ (69 per cent) and the ‘transition to a lower-carbon and nature-positive world’ (63 percent).
David Hedalen added:
“There are a number of structural megatrends taking force across the Private Markets universe – from life sciences, to the energy transition and shifting demographics. It will be critical for investors to understand these trends and refine their ability to determine performance and long-term value at an individual asset level. This might explain why investors are increasingly interested in ‘multi-asset pooled funds’, ‘single-asset pooled funds’ and ‘co-investment’ as routes-to-market. All three offer efficient access to a manager’s expertise alongside experience in asset selection rather than investing directly. Our findings show these entry points have increased in popularity over the last 12 months, rising by five per cent, three per cent and eight per cent respectively.”
Other findings
- 57 per cent of all investors expect to increase allocations outside their home market over the next two years, indicating recognition of the benefits regional diversification can bring. Investors in Asia-Pacific are most likely to increase allocations outside their home market (64 per cent).
- ‘Proven investment performance’ is considered most important when selecting an asset manager for Private Markets investments, with 76 per cent of investors globally highlighting this as the primary driving force behind their decisions, followed by ‘competitive fees’ (68 per cent) and ‘proven expertise in thematic/sectoral strategies’ (65 per cent).
- Globally, ‘asset valuations’ and ‘high transaction costs’ (both 46 per cent) are considered the biggest barriers to investing – or increasing investment – in Private Markets.
- ‘Global recession’ was considered the biggest perceived risk by 51 per cent of global respondents, followed by ‘liquidity risks’ (46 per cent) and ‘political risk’ (43 per cent).
To download a full copy of the report, please click here.
