State Street released the results of its third annual private markets survey, which explored the allocations of 480 institutional investors, including traditional asset managers, private market managers, insurance companies and asset owners across North America, Latin America, Europe and the Asia-Pacific region.
The survey revealed that the rotation from public to private assets within portfolio allocations will grow further in the coming years. Approximately 36% of institutions have already allocated more than 50% of their portfolio to private markets, and that number is set to grow to 41% of institutions over the next three to five years. Approximately 59% of institutions have already allocated 30% or more to private markets, and that number is expected to grow to 71% by 2028.
Infrastructure and private debt are the most attractive asset classes, with 71% of institutional investors expecting to increase allocation to each over the next one to two years. However, longer term private equity is set to return to favor, with 73% of investors planning to increase allocations to the asset over the next three to five years. Investors intend to decrease allocation in public markets to meet increased demand for private exposure.
“The great rotation from public to private markets is not slowing down, with investors set to allocate more to private assets than ever before,” Donna Milrod, executive vice president and chief product officer at State Street, said. “This increasingly sophisticated private market universe means the current economic environment, coupled with investors’ desire for wider, more diverse avenues of capital, is making private markets attractive now and for the foreseeable future.”
Challenging Economic Conditions Remain
Many respondents (61%) believe that inflation has peaked in their local markets, but most do not believe it will fall back within their local central banks’ target range over the next two years. Some respondents (58%) are finding that macro challenges are making fundraising difficult, which is leading to delays of three months to a year or more. In response, institutions are increasing their diversification and investment in risk management and reducing risk exposure, with 43% exploring fresh market niches, 38% enhancing risk management processes and 34% reducing risk to protect against downside.
“Overall, while demand for private market assets continues to grow, investors are also experiencing a tightening supply of quality deals and express that borrowing costs can be an issue for them,” Scott Carpenter, global head of private markets and credit at State Street, said. “Central bank decisions on rates and the state of inflation will heavily influence opportunities and investing behaviors over the next couple of years.”
AI-Enabled Technological Innovation
Risk measurement and management, liquidity management and the ability to forecast future and capital pacing are among the top operational challenges institutions face when investing in private markets. Almost 80% of investors are looking for a centralized, accessible platform for public and private asset data, as the current lack of availability, accuracy and timeliness of data is an overlooked aspect of private markets.
However, recent advancements in artificial intelligence have the potential to improve private markets operations significantly. Nearly half of respondents (43%) believe that machine learning has the potential to enhance private markets operations, while more than half (58%) believe that generative AI will enhance operations.
“AI excitement from institutional investors is driven by the industry’s historic deficiencies in quality private market data,” Milrod said. “Subpar access to quality data is a major impediment that stands in the way of a firm’s ability to view and assess public and private assets data in one place. As we speak with clients, it is clear AI has the potential to hugely improve this aspect of the market.”
Improvements Through Legislation
Institutions remain skeptical about prospects for increased retail investment in private markets but see potential for legislation to open options and drive flows. More than half of respondents (54%) believe current investment products do not make the asset classes suitable for retail investors, while around half (49%) believe there is strong demand for access to private markets among retail or DC investors.
