Georg Wunderlin,
Global Head of Private Assets,
Schroders

Over the past four years, Schroders has spoken to hundreds of institutional investors about the challenges and opportunities that form their decisions, as part of a detailed survey of trends in the plans and priorities of influential global investors.

One of the key themes explored each year is the role that private assets play. Private asset investing remains challenging, but plays a major and growing role in asset allocation plans.

Liquidity and fees are top challenges

Asked to select the biggest difficulties involved in incorporating private assets into a portfolio, liquidity challenges and high fees remain the main sticking points for most investors.

In 2019 and 2020, fees were cited as the main challenge (59% in 2019; 56% in 2020), while liquidity issues rose slightly in prominence this year (53% in 2019; 56% in 2020).

However, the illiquidity of private assets also has its benefits. Indeed, the findings show that the illiquidity premium associated with private assets is an attractive feature, with 63% citing it as a good reason to invest.

The complexity of private assets was the concern that rose the most significantly in importance over the year. It increased by 10 percentage points compared with 2020 (more than any other category), with 47% listing it as an obstacle.

Challenges worth tackling

Despite these challenges, the responses show that institutional investors expect to continue increasing their allocation to private assets. The respondents indicated that private assets as part of their overall portfolio would rise from 13.7% to 14.1% over the next 12 months.

This is an even more significant rise when compared with the average allocation to private assets of 12.2% in 2019.

This is an especially notable result given the timing of the survey, which was in April this year.

In hindsight this time was ‘peak-uncertainty’ for the Covid-19 crisis. It is also notable that virtually all respondents (~90%) correctly expected Covid-19 to lead to a global recession.

Despite this, of those who had made up their mind over Covid-19’s asset allocation impact - some respondents thought it too early to say - only a third thought the crisis would slow down their allocation to private assets. For everyone else, the plan is to remain on track, or even increase, their exposure to private markets.

The study showed particularly notable increases in interest for real estate debt, infrastructure equity and insurance-linked securities.

What is the private asset payoff?

Historical crises have shown that portfolios with significant exposure to private assets achieve strong long-term investment performance. The survey shows that this is increasingly well-understood by institutional investors.

Private assets strategies and solutions can be constructed to benefit in almost all capital market scenarios and will be critical to generating returns in the next decade.

It is for this reason that private assets are increasingly sought after by investors as a natural source of diversification, alternative income or return. Especially, when the global economic and corporate outlook remains so unclear.

In Asia Pacific, 70% of institutional investors are expecting returns of 5-9% over the next five years, but only 32% of them are confident of securing their anticipated returns - a significant drop from 52% in 2019.

Globally, around 80% of institutional investors see private assets as a route to greater diversification and higher return over the long term. In fact, close to half are making use of private assets as a way to directly manage risk.

All in all, the search for alternative sources of return continues unabated. Yet the complex nature of private investing - recognised by the survey - means it is vital for institutional investors to be discerning about where and how they allocate to private assets. Delivery will be key, and will rest with providers who are able to access alternative sources of return and in a transparent and stable format.

Click here to learn more about the private equity opportunities there are.

IMPORTANT INFORMATION

Investment involves risks. This material is issued by Schroder Investment Management (Hong Kong) Limited and has not been reviewed by the SFC.