Private market investments such as real estate, infrastructure, private equity and private credit have recently gained traction among institutional investors. In part, this is because they offer access to sectors and companies that are not available via public means, they avoid some of the volatility that troubles listed securities and they can potentially generate greater returns.
Ed Hails (Portfolio manager, WTW)
Lorant Porkolab (Trustee director, LawDeb)
John McNichols (Managing director and head of multi-asset strategies, Barings' Private Assets Group)
Vikram Raju (Head of impact investing private markets, Morgan Stanley Investment Management)
This discussion – which was hosted by Funds Europe’s owner, Camradata – explores the driving forces in private markets, the challenges and opportunities facing the sector, and how investors can identify sustainable investing prospects.
We began by asking participants, each of whom work in or with private markets, if they recognised a growing interest in their sector.
WTW portfolio manager Ed Hails says his firm had been a long-time user of private assets, as doing so fits with its diversification strategy. There had been a modest increase on what he describes as “a reasonably high base already” among their portfolios.
Away from WTW’s own clients, Hails reflects that the broader market had likely seen a moderate increase in private market use. He says the use of private assets would be highly dependent on investors’ circumstances, their chosen time horizon and tolerance for illiquidity. This is particularly the case for defined benefit (DB) schemes, which may be close to the end of the journey plan and subsequently thinking about, or currently, de-risking.
Lorant Porkolab, trustee director at LawDeb, is more convinced private assets in general are being more widely adopted by DB schemes. “The trend is obvious, at least in relation to UK DB pension schemes, that the allocation to various different assets in private markets has been steadily increasing, and the growth in that area – at least in my view – has been one of the most interesting and prominent developments in the institutional investment world over the last decade.”
Real estate is one of the more traditional areas in private markets and one that institutional investors are typically more comfortable and familiar with, comments Porkolab. However, he has recently seen an increase in allocation to private credit and private equity too.
“Private credit can become a very important component in an investment strategy and it should be part of the journey planning considerations for pension schemes, as the associated contractual incomes can be used very well when pension schemes are thinking about risk reduction, matching liabilities, and benefit payments. Private equity is obviously a riskier asset class and it would play a very different role in the portfolio, but it’s another area where we have seen an increased interest. Trustee boards are getting more comfortable with some allocation to private equity, not just to private credit,” he adds.
The market trends spotted by the panellists hold up to scrutiny. According to McKinsey’s annual survey of the sector in April 2021, global private equity assets under management had reached $4.5 trillion in the first half of 2020 – a 6% increase from the end of 2019, or an annualised increase of 16.2% since 2015.