PE most in-demand alternative asset class

Oksana Patron

7 February 2023

Private equity will become one of the most attractive alternative asset classes in the next two to three years, as two thirds of institution investors have declared their growing allocations to private markets as their search for discounted opportunities amid tougher economic conditions continued.

According to State Street Survey,  of 480 instos surveyed globally, including traditional asset managers, private market managers, insurance firms and asset owners, 43% said that private credit remain “least likely” asset class within private markets to receive their biggest allocations, but 48% declared their allocations to private real estate infrastructure.

In total, 63% of respondents said they would make their largest allocation to private equity within the next three years.

On top of that, the asset owners signalled a greater focus on deal quality in the future with many investors planning changes to their due diligence process (47%) and narrowing their universe of investments.

At the same time, the survey found that increased transparency could help asset managers unlock potential or retail market as 66% of private market managers were of an opinion that alternative assets represented value for retail investors, and in particular those wanting to add more diversification to their portfolios.

However, 72% believed that the increased transparency would make private markets more suitable for retail investors, with a majority (58%) saying that digital fractionalisation of private markets would additionally contribute to this trend.

Paul Fleming, head of the Global Alternatives Segment for State Street, warned that although tougher economic conditions were expected to create discounted opportunities in this market segment, half of surveyed investors thought that valuations had not yet fully adjusted.

On the other hand, private markets data management was also voted as a ‘huge challenge’ as 53% of institutions reported spending resources on manual processes and outdated systems, leaving the room for leveraging the potential of data in making effective decisions.

Migrating data storage and analysis to the cloud was the top priority, with 71% of surveyed respondents planning on investing in this field.

“There are strong imperatives for private market investors to address operational inefficiency and data management limitations as higher borrowing costs and a rising compliance burden squeeze margins. A volatile economic backdrop also puts added emphasis on risk management,” Jesse Cole, global head of Private Markets at State Street, noted.

“On top of creating efficiencies, many investors also believe that data management and analysis capabilities are a source of competitive advantage and managers need highly structured data management processes in order to maximise returns.”