Allocations to Private Markets reach new high – Aviva Investors research

Of the three regions surveyed, North American institutional investors had the highest average allocation to Private Markets, with 14.4 per cent of overall portfolios invested in such strategies. This compares to 12.1 per cent in Europe and 11.9 per cent in Asia-Pacific. North American investors also represented the largest year-on-year increase in allocations to Private Markets across the three regions, rising nearly 2 per cent versus last year (12.5 per cent).

This year’s Study also found 88 per cent of global institutional investors plan to increase (49 per cent) or maintain (39 per cent) Private Markets allocations over the next two years, with 76 per cent expecting Private Markets returns to outperform Public Markets over the next five years, up from 73 per cent in last year’s Study.

More than three-quarters (76 per cent) of those surveyed state ‘diversification of risk and returns’ as being a primary reason for allocating to Private Markets, alongside ‘the presence of an illiquidity premium’ (55 per cent), where investors are compensated with higher returns to reflect the increased illiquidity of an investment. Aviva Investors’ quarterly ‘Illiquidity premia in private debt’ evidences and looks to quantify the concept of illiquidity premia, having analysed more than 2,100 private debt transactions from over a 28-year period. In November, the research established illiquidity premia in private debt as sitting above long-term average levels.

David Hedalen, Head of Private Markets Strategy & Research at Aviva Investors, said:

“This year’s Study shows the increasing importance of illiquidity premia as a major factor for investors allocating to Private Markets, with 55 per cent of global investors viewing it as a driver, up from just 25 per cent in 2023. Investors in private markets are increasingly leveraging better data to calibrate models and make more informed decisions and illiquidity premia forms part of this conversation. Becoming more confident in this reward for having increased illiquidity in portfolios will drive investor confidence that these assets can generate improved returns over the long run. We think this helps to explain why it is fast becoming a central pillar for allocating to Private Markets.”

All three regions agreed private equity (51 per cent) and infrastructure equity (46 per cent) were the asset classes they expect to deliver strongest risk-adjusted returns over the next five years. This was followed by private corporate debt in North America (31 per cent) and Europe (34 per cent), with institutional investors and Asia-Pacific instead highlighting real estate equity (32 per cent) as their third-strongest option. Real estate equity remains the dominant private markets allocation globally, representing 22 per cent of total Private Markets allocations by institutional investors today. Private equity (21.5 per cent, up from 18.8 per cent in 2024) and private corporate debt (12.5 per cent, up from 10.3 per cent) are the two asset classes that have seen the largest increase in overall allocations since the last edition of the Study.

David Hedalen, said:

“Real estate equity remains the dominant destination for global institutional investor capital in Private Markets, with its familiarity, scale and depth, continuing to underpin its prominent role in institutional portfolios. Although the data suggests enthusiasm moderated slightly, investors appear to be more willing to make considered adjustments to real estate exposure. With the market having entered a new cycle following its correction in 2024, this likely reflects a more considered rebalancing in response to relative value opportunities and structural considerations, rather than a wholesale reassessment of the sector.

With defined contribution (‘DC’) now representing 59 per cent of total pension assets in the seven largest pensions markets², 72 per cent of DC funds globally agree that adding Private Markets assets to accumulation portfolios will deliver better performance outcomes for members, with European investors being in most agreement with this statement (73 per cent). 59 per cent of DC funds also agree there should be more focus on long-term value and less on cost when considering Private Markets in DC portfolios. Only 13 per cent of North American DC funds agree that investing in Private Markets should support economic growth in their home country, versus a global average of 41 per cent, 52 per cent of European DC funds and 41 per cent in Asia Pacific.

Where DC funds have added Private Markets assets to their default funds, real estate (59 per cent), private debt (48 per cent) and private equity (43per cent) are the most popular asset classes to have been incorporated.

Within private debt, all three regions view asset-backed lending (49 per cent), alongside opportunistic and distressed debt (48 per cent) as the sub-asset classes where they expect to find the most attractive risk-adjusted returns over the next 2 years.

David Hedalen said:

“The rise of private credit is another fascinating trend within this year’s data. This is no longer a substitute for bank lending, but instead is a specialised and differentiated asset class which has become increasingly sophisticated and the routes to market more heterogeneous. As the asset class continues to mature, it is important asset managers guide and educate institutional investors through the increasingly nuanced and bespoke strategies on offer and how best to access these investments, to ensure there continues to be strong alignment with long-term investment needs. Ultimately, we see a strong case for strategies such as multi-sector private credit for this reason, which can pivot across sectors and capital structures as relative value shifts.”

The Study also shows a sharp year-on-year increase in appetite for pooled funds and co-investment, with 58 per cent of respondents favouring single-asset class pooled funds versus 40 per cent last year and 54 per cent stating co-investing is their preferred route to market compared to just 35 per cent last year. Multi-asset pooled funds were the third most popular way of investing in Private Markets, with 50 per cent of respondents citing this option, a slight increase on 46 per cent last year.

This preference for co-investing was also true for large institutional investors, representing a large shift in sentiment from last year’s Study. 59 per cent of investors with 10-20 billion in AUM³ and 57 per cent of those with 20 billion or more in AUM prefer co-investment over other access routes, up from just 25 per cent and 38 per cent respectively last year. For the biggest investors, access to larger deals is the biggest attraction (55 per cent), followed by cost reductions (47 per cent), with gaining access to high-quality assets the other key driver (41 per cent). 79 per cent of global investors cited flexibility over contributions and withdrawals and there being no fixed lifespan or deadline for exit as being the biggest perceived benefit of evergreen funds. With just 30 per cent highlighting more frequent valuations.

David Hedalen, said:

“Whilst pooled funds remain the most popular access route, our findings also show a marked increase in appetite for co-investment opportunities from institutional investors of all sizes. We think this is a significant finding. Not only does it suggest demand for better access to larger opportunities, but it could also highlight the desire to have greater control of portfolios at an asset-specific level and capturing opportunities that allow an increasingly tailored approach to risk and return metrics, liability profiles, as well as other non-financial outcomes, such as regional preferences.”