Investors have a growing appetite for private assets, turning to them amid fears of an economic slowdown and heightened geopolitical concerns, according to an annual study by asset manager Schroders.
Over the next three years, more than half of investors globally — including 58 percent of those in North America — plan to increase their allocation to assets such as real estate, private equity and private credit, Schroders found by polling 650 institutional investors with $25.4 trillion of assets. A majority attributed their sharpened appetite to needing bigger returns and diversification.
Stocks markets dropped this week amid concerns that President Donald Trump’s trade war with China may be starting to harm the U.S. economy. While investors see private markets as a hunting ground for stable, long-term assets, “there is no guarantee that higher returns will be achieved,” Schroders cautioned. Investors at pension funds, sovereign wealth funds, insurers, endowments, and foundations responded to the survey.
In the longest-ever bull market, investors have been watchful for signs of an economic slowdown. Stocks fell after the Institute for Supply Management announced October 1 that its U.S. manufacturing index declined in September to the lowest level since June 2009 — the last month of the Great Recession.
“The slowdown in manufacturing may have further to run,” UBS Group’s chief investment office said in a Wednesday research report. “We don’t think stocks can move much higher from here and we remain modestly underweight equities.”
The S&P 500 index fell about 1.8 percent Wednesday after the ADP National Employment Report showed slowing private-sector job growth. “Businesses have turned more cautious in their hiring,” Mark Zandi, chief economist of Moody’s Analytics, said in the ADP National Employment Report. “Small businesses have become especially hesitant. If businesses pull back any further, unemployment will begin to rise.”
Investors with plans to increase allocations to private assets most frequently named private equity as the category where they are seeking more exposure, according to the Schroders survey. Thirty-seven percent of institutional investors said they intend to boost allocations to private equity, while about one quarter plan to invest more in private debt, infrastructure equity, and real estate.
Among the less popular private assets were infrastructure debt (15 percent of investors planned bigger allocations), real estate debt (8 percent), and insurance-linked securities (4 percent).
While global appetite for private markets grows unabated, investors have concerns and hurdles to overcome.
Fees, “liquidity issues,” and complexity are the biggest challenges they face in allocating to private assets, according to the study. Their top concern is high valuations, “reflecting fears the market could be overheating on the back of a decade of funding growth,” Schroders said.