Even with fears of inflation and higher interest rates, a majority of institutional investors still appear to be relatively bullish on private market assets, according to a survey released by State Street (NYSE:STT) on Monday.
Some 68% of respondents said they plan to keep their private market allocations in line with current targets, even as they acknowledge that rising interest rates reduce the appeal of the highly leveraged asset class.
“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,” said Paul Fleming, head of State Street’s Global Alternatives Segment. “Dry powder will become invaluable in the next couple of years.”
Private equity remains the most attractive private market asset class, with 63% of institutional investors anticipating making it their largest allocation in the next two to three years. Private credit was least likely (43%) to be their largest allocation. Real estate and infrastructure both stood at 48%.
The more challenging macroeconomic conditions are motivating institutional investors to be more critical in their investments. 47% of the respondents said they were making changes in their due diligence processes, while 42% said they will narrow the universe of investments they’ll consider through higher baseline standards.
Some 66% of private market managers said they believe that alternative assets can benefit retail investors who are seeking new sources of diversification. 72% of the respondents said they expect increased transparency will make private market assets suitable for retail investors. And a majority, 58%, believed digital fractionalization of private markets will contribute to that trend.
Opening private market assets to a wider investment base, though, is also likely to compel regulators to tighten reporting requirements, the majority of managers said, according to the survey.
The study, commissioned by State Street (STT) and conducted by CoreData Research, surveyed 480 respondents from traditional asset managers, private market managers, insurance companies and asset owners across North America, Latin America, Europe, and Asia Pacific in September to November 2022.