Private market investments have become overweight in institutional portfolios following this year’s substantial declines in public markets. Half of investors are waiting “as long as necessary” for this dislocation to subside. The other half is concerned, a new survey by Bfinance shows.
Bfinance’s Global Asset Owner Survey questioned nearly 400 senior investors in 40 countries worldwide. Collectively, their institutions are responsible for some 13 trillion dollars in assets. Almost half of the respondents are pension funds.
“A secular macroeconomic transition has created an unenviable series of choices - and potential traps - for pension funds, insurers, endowments, family offices and other ‘asset owners’ across the globe,” the Bfinance report starts.
Eagerly watched in Luxembourg
The report is of particular interest to Luxembourg, where interest in private assets and alternative investments has increased significantly in recent years. Industry discussions at the Luxembourg Private Equity Association LPEA and the Association of Luxembourg’s Fund Industry ALFI, which hosts its private assets conference next week, have made clear that firms are increasingly looking to market such products also to a wider group of investors.
Since 2008, allocation of funds to illiquid strategies has risen sharply and steadily. This year’s major blows to the public equity and bond markets have led to a situation where investors now have increased exposure to private markets.
For example, Bfinance lists a Chinese insurer, which now has an overweight position in unlisted assets due to the strong performance of the asset class. A foundation from Finland argues that decreased valuations in public markets together with capital calls are causing a rapid increase in allocation to private. And the portfolio of a pension fund from Canada has become less liquid due to margin calls as a result of a break in the correlation between equities and bonds.
‘Extremely problematic’
“Even if investors do ultimately anticipate that private markets will fall into line with public markets, this does not mean that they can ‘wait as long as it takes’,” the Bfinance researchers warned.
“A steep temporary decline in overall liquidity can become problematic where investors need to meet margin calls, fund commitments or handle other cash flow demands. The recent pressures faced by UK corporate pension funds are a useful cautionary tale in this regard.”
One third of investors surveyed by Bfinance expect their portfolios to become less liquid over the next 18 months, compared to 12 per cent who expect them to become more liquid. In the Netherlands, over a quarter of 39 respondents expect their portfolios to become less liquid in the coming period.
“Investors should continually challenge liquidity models and assumptions to ensure that overall investment strategies are robust,” Bfinance said. “Forced selling of private market positions can be extremely problematic.”
‘No pressure to rebalance’
Almost half of investors, especially family offices, associations, foundations and sovereign wealth funds, seem relatively patient, indicating that they are waiting quietly. Three in four family offices feel “no pressure to rebalance at all”, the survey results said. Out of those surveyed, 49 per cent said they can “wait as long as it takes” to the dislocation between public and private strategies to unwind.
The other half of private market investors do feel pressure to rebalance because of the major disruptions in the public markets. Some 19 per cent think of this imminently, and 32 per cent within a few quarters.
Asked about the issue asset owners are wary of, Bfinance highlights some of these responses. A pension fund from Canada specifically mentioned the valuations of private assets, a pension fund from New Zealand mentioned the disruption between public and private markets.
Fewer equities, more bonds
Private markets remain popular as a category to which investors want to allocate more assets. Half of the nearly 400 asset owners surveyed said they would like to allocate more to private markets in the next 18 months. In previous years, this was a similar percentage.
Incidentally, in the Netherlands, only 34 per cent want to increase their position in private markets in the next 18 months. 38 per cent want to stick to their current position in private markets.
Within public asset classes, there is a big movement from equities to bonds. One quarter of investors said they plan to reduce their allocation to equities in the next 18 months. Another quarter actually plans to increase their allocation to fixed income over the same period.
Inflation makes goals hard to achieve
Incidentally, just over half of the asset managers surveyed are satisfied with their performance in 2022. In the Netherlands, the figure is 43 per cent. 87 per cent of global respondents said inflation and rising interest rates will impair their ability to achieve their investment goals.
Asked how satisfied investors were with the performance of active managers, unlisted infrastructure - a major class in Luxembourg - stood out among all other asset classes with a 95 per cent satisfaction rating, followed by private equity and private debt, which both had a 94 per cent rating.
Investors were least satisfied with emerging market equities and fixed income.