Competition for private markets assets could increase substantially in the next few years after a study found institutional investors are eager to increase their exposure to these asset classes.
Aviva Investors’ latest Private Markets Study found that more than half (51%) of the 500 institutions surveyed expected to increase their allocation to private markets over the next two years.
European investors – including those in the UK – were the most likely to want to invest more, with 57% saying they will increase allocations.
Diversification was the main reason cited by respondents for wanting to invest into private markets, with 70% highlighting this. However, 47% cited the illiquidity premium that can be harvested from unlisted assets as a key factor in future allocation decisions.
“The illiquidity premium is emerging as a driving force behind the trend towards private markets, and investors are recognising it as a reason to increase their allocations to these strategies.”
David Hedalen, Aviva Investors
Aviva Investors said this factor was “expected to become an increasingly important characteristic” for private markets investors.
David Hedalen, head of private markets research at Aviva Investors, said: “The illiquidity premium is emerging as a driving force behind the trend towards private markets, and investors are recognising it as a reason to increase their allocations to these strategies.
“Investors have had to adapt to changing market conditions over the last 12 months. Despite this, allocations to private markets have continued to trend upwards. It suggests a recognition of these asset classes to deliver across various stages of the investment cycle and offer diversification from public markets.”
Almost three-quarters (73%) of institutional investors said they expected private markets investments to outperform public markets over the next five years.
Aviva Investors surveyed 500 institutional investors from Europe, North America and Asia, including corporate and public sector pension funds, insurance companies, and financial institutions.
Overall, private markets investments make up 11.5% of institutional investor portfolios on average, the study found. This is up from 10.5% last year.
More than half (56%) of investors allocate at least 10% of their portfolios to private markets. This has also increased year-on-year, up from 48%.
Investors were most confident of strong returns in real estate equity over the next five years, followed by private equity and infrastructure.
Hedalen said this was a “prudent view”, citing stabilising valuations and improvements in market liquidity.
“With discerning asset selection, investors able to allocate into this part of the cycle should be able to look forward with confidence,” he added.
