State Street Corporation have released the results of a survey1 of private markets allocations from 480 institutional investors including traditional asset managers, private market managers, insurance companies and asset owners across North America, Latin America, Europe and Asia-Pacific.
“The tailwinds of the last decade may be gone, but it is clear that private markets remain extremely attractive,” said Paul Fleming, head of the Global Alternatives Segment for State Street. “Our survey finds that three quarters of respondents believe tougher economic conditions will create discounted opportunities, but investors are likely to bide their time, as at least half feel valuations have not yet fully adjusted. Dry powder will become invaluable in the next couple of years.”
The survey finds that 68 percent of the respondents plan to continue their allocation to private markets in line with current targets, despite acknowledging that rising interest rates reduce the attractiveness of the highly leveraged asset class. Within private markets, private equity (PE) remains the most attractive asset class, with 63 percent of institutional investors anticipating making it their largest allocation in the next two to three years. Private credit is the asset class investors are least likely to make their largest allocations to, (43 percent), with real estate and infrastructure both at 48 percent. Respondents made it clear they were going to be more focused on deal quality in the future with many making changes to their due diligence processes (47 percent) or narrowing the universe of investments they will consider through higher baseline standards (42 percent).
Asset managers can unlock huge potential of retail market by increasing transparency
There is a strong consensus among private market managers (66 percent) that alternative assets can add value for retail investors who are seeking new sources of diversification. Moreover, 72 percent of respondents believe that increased transparency will make private market assets suitable for retail investors. A majority (58 percent) believed digital fractionalization of private markets assets would contribute to this trend.
“Private market managers are quite bullish on tokenization going mainstream in the next three plus years, as they look to widen their investor base,” continued Fleming. “However, democratization will place fresh demands on private market managers from a regulatory and transparency perspective. The majority of managers believe regulators will be compelled to introduce more stringent reporting requirements as retail participation rises. It is critical for private managers to enhance their data management, which will help them reach the next stage in their growth.”
Private markets data management remains a huge challenge
State Street’s survey finds that more than half (53 percent) of institutions report spending considerable resources on manual processes and outdated systems. Maximizing the potential of data to make more effective decisions is the greatest focus for institutional investors, although less than 40 percent of them think this area is well developed in their organizations. As institutions prepare for new demands on operations, migrating data storage and analysis to the cloud is their top priority, with 71 percent of respondents investing in it.
“There are strong imperatives for private market investors to address operational inefficiency and data management limitations as higher borrowing costs and a rising compliance burden squeeze margins. A volatile economic backdrop also puts added emphasis on risk management,” said Jesse Cole, global head of Private Markets at State Street. “On top of creating efficiencies, many investors also believe that data management and analysis capabilities are a source of competitive advantage and managers need highly structured data management processes in order to maximize returns.”