As public markets continue to be gripped by uncertainty, some of the world’s largest institutional investors are thinking about boosting their exposure to private assets, say Titanbay.
Globally, private market investments make up around a quarter (24%) of institutional portfolios, according to the latest edition of BlackRock’s Global Private Markets Survey . But that number is set to rise. As many as 72% of respondents said they plan to increase their allocations to private equity this year - 43% of those substantially so, the survey data showed. More than half of respondents said they also plan to increase their allocations to private credit, real estate and multi-alternative solutions.
The appeal of private markets hasn’t changed even as the broader economic backdrop has shifted - the bulk of institutional investors who are allocating money to private markets are doing so for income generation (82% of respondents in the survey), particularly when it comes to real estate, private credit and infrastructure. Just over half (58%) said they invest in private markets for capital appreciation.
Private asset opportunities
Within private markets, the current environment is opening up a range of opportunities. The same report shows that institutional investors in private credit see infrastructure or real estate debt (51%), followed by distressed debt (50%) as among the biggest opportunities. For private equity, institutional investors see mature companies as the biggest opportunity (56%), followed by venture capital-backed entities (40%). In real estate, it is a dead heat between niche sectors such as cold storage and data centres, and residential property (both 55%).
While a majority of investors surveyed said that they intend to increase their allocations to private markets, a number of remaining barriers discourage further investment. Liquidity concerns are chief among them, with 49% of respondents citing illiquidity and capital lockup as a reason to limit private market allocations. Another 41% said getting internal stakeholder buy-in was the second biggest obstacle, followed by not having the appropriate legal structures or operational set up in place to invest in private markets (33%).
BlackRock said those liquidity issues may create investment opportunities in the secondary market, with volumes hitting $108 billion last year as both limited partners and general partners sought to offload investments to access liquidity. The survey authors believe this could create potential discount opportunities for buyers if sellers need liquidity in a hurry. Titanbay’s in-depth report and video explain more about investing in secondaries.
When it comes to choosing a manager, investor diligence varies significantly. The top response was access to opportunities (45%), followed by a manager’s investment strategy (42%) and then expertise across asset classes and/or regions (40%). Historic performance was only the seventh most popular reason for selecting a manager, with 31% of respondents citing a manager’s track record as a top priority. There were some regional disparities, however - in EMEA, institutional investors are prioritising a manager’s approach to environmental, social and governance matters.
Other market watchers are also optimistic about the potential for private markets in the current environment. EY, for example, says private equity is better suited to manage volatility today than ever before . With firms sitting on more than $1.2 trillion in dry powder, they have ample capital to take advantage of fresh buying opportunities at more attractive valuations than the past few years. So far this year, 80% of private equity activity by value has involved take-private transactions - a record, EY said.
That backdrop is enabling savvy managers to secure better deal terms, according to JP Morgan . Funds that are launching now also stand to benefit, the bank said, given that funds formed in times of economic stress and market volatility tend to outperform. Likewise, private credit funds that are launching in the current environment may also stand to benefit given public credit markets and bank lending have receded, meaning companies who need to borrow have fewer options. That is not to mention the distressed debt and ‘special situation’ opportunities that are likely to emerge, JP Morgan said.
Of course, private equity performance has been affected by the broader downturn. But according to McKinsey’s Global Private Markets Review , public equity markets suffered steeper declines in 2022. With some of the world’s smartest institutional investors planning to increase their allocations to private markets, and with public market volatility likely to persist amid a still uncertain economic backdrop, now may be the time for investors to rethink their exposure to private assets.
This material has been prepared by Titanbay Ltd and its affiliates (together, “Titanbay”) and is provided for information purposes only. This document is directed at professional investors and qualified investors who have sufficient knowledge and experience to understand the risks of investing in private market investments.
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Investments in private placements and private equity investments via feeder funds in particular, are complex, highly illiquid and speculative in nature and involve a high degree of risk. The value of an investment may go down as well as up, and investors may not get back their money originally invested. Investors who cannot afford to lose their entire investment should not invest. Past performance, including simulated performance, is not a reliable indicator of future performance. For private equity investments via feeder funds, investors will typically receive illiquid and/or restricted membership interests that may be subject to holding period requirements and/or liquidity concerns. Investors who cannot hold an investment for the long term (at least 10 years) should not invest.
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