Private markets outlook: from headwinds to tailwinds

Institutional investors’ demand for private assets remains resilient

There has been an abundance of media coverage and commentary around the private markets space in recent months. Despite a challenging global macroeconomic environment, State Street’s third global survey of private markets shows that institutional investors are digging in for the long haul and expect global regulatory developments to support sustained growth in demand for private assets.

State Street surveyed C-suite and other senior, decision-making executives from asset managers, private markets businesses, pension funds, insurance companies and other asset owners. The report of the findings provides insights into manager and investor approaches to various asset classes, exploring both macro asset allocation level and operational developments within those institutions. These are the key findings from this year’s survey.

Investors and asset managers anticipate growth in private markets exposures

The majority of institutions said they will increase their exposures to almost all private markets sub-asset classes (infrastructure, private debt, private equity and real estate) over the next two years and all of them over five years. Institutions are likely to reduce public market allocations to fund more private markets investment, with private markets set to make up nearly half of the average portfolio by 2028.

Demand for holistic data platforms

There is new demand for data platforms offering a ‘whole-of-fund’ view that allows institutional investors to see their private assets in line with the rest of their holdings. As private markets holdings grow, institutions need to be able to view and analyse their exposure in the same way they analyse their public asset holdings. A quarter of respondents said the ability to do this would be ‘transformational’ for their private markets operations. This demand is leading organisations to challenge traditional obstacles to getting accurate and timely portfolio and holdings data for private assets.

Improved risk assessment will be key

We are seeing a new focus on better risk measurement in private markets assets. Despite institutions seeing some respite from the macroeconomic headwinds of the past few years, almost half (45%) said they were still struggling to justify relatively high-risk investments to investors who have leveraged themselves at higher costs to access the asset class.

Approximately a third are seeking to take on less risk in their private markets portfolios in the future. Meanwhile, 19% are planning to increase risk in their private markets holdings to boost returns. Either way, the greater focus on portfolio data outlined above is tied to a strong focus on better measuring and assessing risk in private markets allocations. This is a significant impetus behind growing demand for improved access to data and technology.

Regulatory developments are encouraging

Global legislative and regulatory developments will drive private markets demand by boosting government support for key industries and infrastructure priorities. Nearly half of respondents in North America and Europe expected legislation like the US Infrastructure Investment and Jobs Act and equivalent policies in the European Union and UK to boost private markets investment in their regions. Asian investors were less bullish but around a third said the same. Along with regulations targeted at growing high-net-worth retail and defined contribution investor bases for private markets funds through new fund vehicles, government interest in private markets is seen as a clear component of the planned portfolio growth.

Private assets becoming more mainstream for investors

A transformation is underway in private markets and across capital markets. Private assets not only continue to take up portfolio share but are also treated more like public ones in how they are assessed, measured and even marketed to a broader range of investor types. This will have important implications for balance and liquidity in the global investment industry and for how companies raise capital. There will be an immediate impact in the investment that organisations will need to make in their private markets data and operations strategy, without which institutions may not achieve operational efficiencies to support their growth.

Survey pain points underscore how asset managers and owners are seeking a consistent and connected platform with greater data transparency, insights to grow at scale, a streamlined and systematic approach to valuations and reduction in manual processing to minimise operational risk.

In other words, considering ‘smart sourcing’ a holistic enterprise platform might present a sensible solution to investors with growing private markets goals. We will dive into that topic and more in future reports about the changing dynamics in private markets.

The full survey report is available here.

Scott Carpenter is Global Head of Private Markets and Credit and Jesse Cole is Global Head of Private Markets Product at State Street.

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