Private market allocations reach record high as investors pump in £4.7 trillion
Global private market allocations from institutional investors have reached record highs, with many planning to increase their allocations over the next few years.
Private markets have risen to represent 12.5 per cent of overall portfolio allocations, accounting for $6.5 trillion (£4.7 trillion) of assets under management, according to the latest study from Aviva Investors.
North American investors reported having the largest average allocation to private markets, with 14.4 per cent of overall portfolios invested.
This was closely followed by Europe which allocated 12.1 per cent, and 11.9 per cent invested in the Asia-Pacific region.
North American investors also represented the largest year on year increase in allocations to private markets across the three regions, rising nearly two per cent from 12.5 per cent.
Increase allocations
Nearly 90 per cent of investors also said they planned to increase or maintain their allocations over the next two years, with investors crediting their decision to diversifying their portfolio to account for risk and growing returns.
Meanwhile, over half noted their reason for upping their investment to “the presence of liquidity premium”, where investors are compensated with higher returns to reflect the increased illiquidity of an investment, up from just 25 per cent three years ago.
Over 75 per cent expect private market returns to outperform the public market over the next five years, up from 73 per cent last year.
David Hedalen, head of private markets strategy and research at Aviva Investors, said:
“Becoming more confident in this reward for having increased illiquidity in portfolios will drive investor confidence that these assets can generate improved returns over the long run.
“We think this helps to explain why it is fast becoming a central pillar for allocating to private markets.”
Private equity and infrastructure
All regions agreed that private equity and infrastructure were the asset classes expected to deliver the strongest returns over the next five years and knock real estate equity from the top spot
This was closely followed by private corporate debt in North America and Europe, while Asia-Pacific opted for real estate equity to be their third strongest option.
Real estate equity represents 22 per cent of total allocations, followed by private equity at 21.5 per cent and private corporate debt at 12.5 per cent, with both asset classes seeing the largest increases since Aviva’s last study.
Hedalen said the expected change to allocations reflects investors making “considered adjustments” to their real estate exposure in order to rebalance their portfolios with “relative value opportunities”.
Pensions market
Within the pensions market, defined contribution (DC) schemes accounted for 59 per cent of total pension assets.
This comes as a large number of global DC funds agree that adding private market assets to portfolios will lead to higher returns for members, with European investors most likely to agree.
Nearly 60 per cent of DC funds also agreed that there should be more focus on long-term value and less on cost when considering private markets being added to portfolios.
Both European and Asia-Pacific investors agreed that investing in private markets also boosted domestic economic growth, but North Americans widely did not share the same sentiment, with only 13 per cent viewing it as economically beneficial.