The vast majority of institutional investors are seeking to increase their allocation to private assets over the next year, mainly for diversification purposes, according to Schroders’ “Institutional Investor Study 2021.”
In the study, 90% of the 750 international institutional investors who responded said their allocations in one or more areas of private assets would rise throughout 2021. Private equity continues to attract the most capital as 37% of respondents say they plan to increase their allocation to those private assets over the next 12 months, followed by infrastructure equity (32%), impact investing and private debt (29% each), real estate equity (21%), and infrastructure debt (18%).
The least popular private asset classes were real estate debt (13%), forestry and agriculture (11%), and insurance-linked securities (10%). The respondents represent corporate and public pension plans, insurance companies, private banks, official institutions, and endowments and foundations that oversee nearly $27 trillion in assets.
“The results this year show that private assets continue to take a greater share of institutional portfolios,” Georg Wunderlin, Schroder’s global head of private assets, wrote in the report. “Even the global pandemic couldn’t derail the momentum.”
The report found that 80% of investors agree or strongly agree that adding diversification was their main reason for acquiring private assets—ahead of even “generating high returns,” which was cited by 75% of institutional investors as their motivation for seeking private assets.
“This diversification has proven to be especially valuable over the last few years,” Sophie Van Oosterom, Schroders’ global head of real estate, said in the report. “Volatility has been high in equity markets and the world has dealt with major disruptions we hardly need to specify.”
Environmental, social, and governance (ESG) considerations took on greater importance during the pandemic, as 37% of respondents said COVID-19 made them put more importance on ESG factors when investing in private assets.
“The growing momentum behind sustainability in private assets will certainly be one to watch over the coming years,” Wunderlin said.
Private debt also demonstrated consistency during the pandemic, according to the report, which said the COVID-19 crisis was “the first true proof-of-concept for private debt” since it was created as an asset class in the wake of the global financial crisis.
“Increases to private debt allocations reflect investors’ belief in its ability to adapt in face of adversity by pivoting toward defensive sectors,” said the report, “for example health care and technology, and renegotiating borrower-friendly funding terms.”
The report cited fees as a main bulwark for investing in private assets and said the perception of liquidity has “fallen materially.” In 2020, 56% of participants cited liquidity as an issue, while in 2021, 42% said illiquidity was an impediment. The complexity of private assets has also diminished in investors’ views, as 35% singled out complexity as a concern, compared with 47% in last year’s study.