Watch the replay of ‘Growing Trends in Private Markets Investments for Asset Owners’ webinar.
The desire for diversification among asset owners seeking new sources of return is fueling allocations to alternative assets. In turn, this requires a sharper focus on balancing exposure and liquidity within the overall portfolio, while managing a deluge of new data, according to a recent BNY Mellon webcast.
In an in-depth discussion to explore the growing appetite of asset owners for private markets investments, BNY Mellon’s Rohan Singh, Global Head of Asset Owners, Asset Servicing and Digital, was joined by Mohamad Hafiz Kassim, Chief Financial Officer of the Employees Provident Fund Malaysia (EPF), Marcus Frampton, Chief Investment Officer of the Alaska Permanent Fund Corporation (APFC) and Frances Barney, Head of Global Risk Solutions at BNY Mellon Asset Servicing.
The knock-on effect of the pandemic on listed markets since early 2020 has accelerated asset owners’ allocations to private equity, private debt, real estate and infrastructure.
And this trend is unlikely to change any time soon. “To ensure return objectives are being met, asset owners are diversifying to private markets and are planning to increase their allocations over the next few years, to potentially seek better return opportunities and hedge against inflationary risks,” explained Singh.
Alongside this increasing exposure to the major private markets investments, however, is the need to keep exposure balanced against the cost of liquidity, expected performance and allocations to public securities. Keeping track of this relies on access to the right data and forecasting models to manage new risks as well as governance.
Research by Preqin reinforces the growing demand for alternative assets. The data provider forecasts growth in assets under management (AUM) in this space to reach US$23.21 trillion by 2026 (see Figure 1) . This is based on a compound annual growth rate of 14.8% for private capital AUM and 4.2% for hedge fund AUM.
Put simply, the landscape for these investments has evolved in line with the search by asset owners for ways to meet return objectives.
At APFC, for example, private markets exposure across equity, debt and real estate comprised around 20% of the overall portfolio a decade ago. This has risen to current levels of around 20% for private equity, 12% for real estate and 9% for private credit, explained Frampton.
EPF has also seen significant growth in its alternatives portfolio. From a relatively small allocation to private markets of around 3% just over 10 years ago, now has a target allocation of 10% today, mostly across private equity, infrastructure and real estate.
Mohamad Hafiz expects this trajectory to continue, with a greater focus in the coming years on access to private markets via direct investments rather than through funds. In line with this, EPF is seeking first-mover advantages in key sectors, based on its previous experience in securing attractive returns in less-trodden real estate assets such as warehouses and logistics.
For APFC, while tech has been its sector of choice within private equity over the past 10 years, Frampton foresees the next decade to be shaped by higher inflation and interest rates, plus global scarcity. “We are looking at energy, materials and private credit going forward,” he explained.
Figure 1: Alternative Assets under Management and Forecast, 2021 - 2026*
*2021 figure is annualized based on data to March. 2022-2026 are Preqin's forecasted figures.
Source: Preqin Alternatives in 2022 Report