More investors turn to private-market assets in 2024

THE quest for yield and differentiated returns is the key challenge facing investors in 2024. Economic factors have shifted from low rates and high growth to an era marked by higher rates and looming recessionary fears.

In response, investors continue to turn to private equity, private credit, infrastructure and real estate to help generate yield and add much-needed diversification to portfolios.

The classic 60/40 (60 per cent equities, 40 per cent fixed income) portfolio may have delivered its best returns since 2019 last year. Despite the win, correlations between the S&P 500 and Bloomberg US Aggregate Bond Index also reached a 40-year high.

Professional investors are looking to private markets for diversification in 2024 and it’s driving new thinking on the asset mix they’ll need.

In fact, according to Natixis Investment Managers’ 2024 Private Assets Report, 65 per cent of institutional investors say a 60/20/20 allocation, enriched with alternative investments, has the potential to outpace the traditional mix in 2024.

Dominating alternative allocations

This move to private assets isn’t altogether new. Professional investors have been seeking similar results, though often for different reasons, for more than 15 years.

As a result, private assets command a dominant 83 per cent share of alternative allocations in institutional portfolios in 2024.

Investors find private equity particularly appealing, thanks to its potential for outsized returns even in a higher rate and slowing growth environment.

Overall median private equity returns look attractive relative to other asset classes, and there is a greater variability of returns between the top and bottom quartile.

SEE ALSO

KKR weighs entering private credit in Japan to challenge banks

Risk is not volatility. Understand the difference for better investment results

Even with more than US$11 trillion invested in private assets and concerns of overcrowding, the allure of private equity remains strong.

Sixty per cent of institutional investors maintain a bullish stance on private equity, drawn by its history of outperforming public markets.

However, given current market factors, the investment focus is likely to shift towards deal quality, resulting in stepped-up due diligence.

For many, the key to sustaining superior risk-adjusted performance is to build diversified private equity portfolios within the small and mid-market.

Many are also finding opportunity outside the equity space through private debt.

One key reason is that the recent surge in interest rates has left traditional lenders in uncharted waters, creating a prime opportunity for private lenders.

With banks facing increased constraints, private debt is poised for growth. Assets under management in private debt are expected to hit US$2.8 trillion by 2028, nearly double the total in 2022.

Opportunities in AI and beyond

Professional investors are looking to capitalise on a booming tech sector as advances in generative artificial intelligence (AI) continue to propel the sector to new heights.

In fact, almost two-thirds of institutions say the race for AI supremacy adds up to a new space race.

Information technology, bolstered by AI, has become the top sector pick for private equity.

Institutions are also finding additional opportunity in tech-adjacent sectors, driven by burgeoning demand for data centres due to the exponential growth of cloud computing and AI solutions.

As more AI companies and solutions come online, demand is set to grow exponentially.

Investments in 5G, electric transport, power grids, and other projects leverage new technologies for enhanced efficiency, many of which align with sustainable investment goals, underscoring the sector’s vast potential.

Growing focus on sustainable investments

Sustainable investments already hold the attention of professional investors.

A remarkable 87 per cent of institutions invested in green bonds plan to maintain or increase their investments in 2024.

This trend is mirrored in private markets, where 35 per cent of institutions identify sustainable investments as the biggest opportunity for the year.

The increase in government funding worldwide for energy transition projects, from US$526 billion in 2018 to a staggering US$1.7 trillion in 2023, underscores the sector’s vitality.

Within private assets and alternatives, investors are more likely to make ESG (environmental, social and governance) investments in private equity at 41 per cent and infrastructure at 39 per cent, ahead of real estate and private debt.

For those seeking to make a tangible impact, the capacity to directly influence asset management through private investments offers a compelling draw.

Wealth management firms are responding to a surge in client demand for sustainable investments, with plans to expand their private asset offerings to include these strategies.

Democratisation in full swing

Institutional investment has been a boon to private markets over the past decade. Now, democratisation of private assets is accelerating, as 34 per cent of individual investors express interest in accessing private investment opportunities.

This interest is reflected in wealth managers and advisers who are expanding their offerings to include more private asset strategies.

Looking at client investment objectives, 64 per cent also say that the long-term nature of retirement saving makes investing in private assets a sound strategy.

Despite questions about overcrowding, more than half (51 per cent) of wealth managers believe increased deal flow is allowing them to offer private investment more broadly to clients, which is a likely reason that funds of funds (42 per cent) top their lists of private asset offerings followed by infrastructure (40 per cent), growth capital (39 per cent), venture capital (38 per cent) and direct co-investment (37 per cent).

Today’s private investment terrain is characterised by a blend of optimism and strategic recalibration. Beyond bonds (69 per cent), the only other markets where institutional investors are bullish are private equity (60 per cent) and private credit (64 per cent).

Investors are not only bullish on the prospects of private assets as levers to capitalise on tighter bank lending and invest in cutting-edge technology and sustainability initiatives, but they are also re-evaluating their approaches to ensure sustained, risk-adjusted performance.

The writer is executive director, Natixis Center for Investor Insight