State Street has released the results of a private markets allocations survey of 480 institutional investors across North America, Latin America, Europe, and Asia-Pacific.
The survey, which included traditional asset managers, private market managers, insurance companies, and asset owners, found that 68 per cent of the respondents plan to continue their allocation to private markets in line with current targets, despite acknowledging that rising interest rates reduce the attractiveness of the highly leveraged asset class.
“The tailwinds of the last decade may be gone, but it is clear that private markets remain extremely attractive,” said Paul Fleming, head of the global alternatives segment for State Street.
“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.”
Within private markets, private equity (PE) remains the most attractive asset class, with 63 per cent of institutional investors anticipating making it their largest allocation in the next two to three years. Private credit is the asset class investors said they are least likely to make their largest allocations to (43 per cent), with real estate and infrastructure both at 48 per cent.
Respondents are increasingly focused on deal quality with many reporting that they will be making changes to their due diligence processes (47 per cent) or narrowing the universe of investments they will consider through higher baseline standards (42 per cent).
Two-thirds (66 per cent) of private market managers said alternative assets can add value for retail investors who are seeking new sources of diversification, while 72 per cent of respondents believe increased transparency will make private market assets suitable for retail investors.
More than half (58 per cent) believe digital fractionalisation of private markets assets would contribute to this trend.
“Private market managers are quite bullish on tokenisation going mainstream in the next three-plus years, as they look to widen their investor base,” Mr Fleming said.
“However, democratisation 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.”
The survey also found that 53 per cent of institutions report spending considerable resources on manual processes and outdated systems. While fewer than 40 per cent of institutional investors think using data to make effective decisions is well developed in their organisations, maximising its potential is their greatest focus.
“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 maximise returns.”
