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INSTITUTIONAL INVESTOR STUDY 2021

Private Assets

Schroders Institutional Investor Study 2021 – spanning 750 institutional investors, collectively responsible for $26.8 trillion in assets – reveals that investors continue to be attracted to the whole spectrum of private markets to increase diversification and access alternative return streams. Globally private equity was the standout asset class for future allocations, whilst impact investing and sustainable strategies in private assets are becoming ever more important, accelerated by the Covid-19 pandemic.

%

plan to increase their private assets allocation over the next 12 months

%

highlight diversification as their primary driver for investing in private assets

%

believe lack of transparency is a major challenge when investing in private assets

%

highlight strategies which focus on assets with a strong sustainable practice as their key ESG consideration

Private assets continue to take a greater share of institutional portfolios. What is encouraging is the emerging signs that the versatility within private markets is being recognised. Indeed, one of the key findings of our Study is that investors are increasingly looking to branch out and explore new areas of private markets. Private markets are incredibly nuanced. They offer a wide risk and return spectrum, such as those based on complexity & liquidity premia. A huge number of private assets-focused investment solutions can also be tailored to individual investor’s preferences.

Georg Wunderlin Global Head of Private Assets, Schroders Capital
Allocations for the next 12 months

Growing awareness of the versatility of private assets with increased allocations expected in the coming year

This year’s Study showed the continued appetite for private markets with 90% of global institutional investors planning to increase their allocations in one or more areas of private assets through 2021. We believe this signposts that the versatility within private markets is being recognised more and more, with investors increasingly looking to branch out and explore new areas.

This versatility is reflected in investors’ allocations for the next 12 months, with increases expected across private equity, infrastructure, real estate and private debt. Additionally, the increased emphasis on sustainability and impact is also clearly evident; institutional investors seem to be looking for investments that have a positive social and environmental impact as well as considering ESG risks to operational and financial performance.

Over the next 12 months, where do you intend to increase your allocation?
Private equity
%
Infrastructure equity
%
Impact investing
%
Private debt (corporate)
%
Real estate equity
%
Infrastructure debt
%
Real estate debt
%
Insurance-linked securities
%
Not all results are shown in this chart
DRIVERS FOR INVESTING

Diversification and opportunity for higher returns continue to be the key drivers for investing in private assets

The opportunity to better diversify portfolios continues to be a key driver for investing in private assets (80%, up from 78% in 2020). As we have seen from the previous result, private markets now represent a multitude of strategies with a variety of return drivers and risk profiles. Therefore, it makes sense that “generate high returns” comes out as the second most important reason for investing in private assets (75%).

Our Study shows that, in addition to expected outperformance, the opportunity to better diversify portfolios is a key reason why investors plan to increase their allocations to private assets. This is not only about diversification across listed and private investments, but also about diversification within private assets. Furthermore, the long tail of private assets that spans across deal sizes and investment types allows investors to be extremely selective and to position their portfolios for exposure to the complexity premium, increased diversification and improved robustness.

Nils Rode CHIEF INVESTMENT OFFICER, SCHRODERS CAPITAL
To what extent are the following factors reasons for you to invest in private assets?
Pie chart
80%

Diversify your portfolio

75%

Generate high returns

58%

Capture illiquidity premium

26%

Access impact investment strategies

29%

Generate a steady income

29%

Hedge against inflation

41%

Lower volatility

To learn more about the diversification & complexity premium in private assets, read our latest insights articles:

CHALLENGES

Cost, lack of transparency and high valuations remain the greatest obstacles when investing in private assets

While institutional investors are aware of the benefits private assets can bring to their portfolio, they also express concern around certain aspects.

Concerns around high fees continue to be the main challenge for institutional investors when considering investment into private assets and is consistent with previous years’ results (54% in 2019; 52% in 2020). Lack of transparency (58%) follows closely behind.​ However, it is important to note that when asked about the challenges, illiquidity (42%) and complexity of the asset class (35%) did not feature among investors’ key challenges. This may suggest that investors are now recognising that illiquidity and long lock-ups, whilst a concern, are also the defining characteristics for private assets and a key reason to invest.

In your experience what are the main challenges of investing in private assets?
60%
High fees
58%
Lack of transparency
and data
47%
High valuations
43%
High levels of dry powder
or deployment rate
42%
Illiquidity
35%
Complexity of the
asset class
34%
Risk of default or loss
of capital
Not all results are shown in this chart
Sustainability in private assets

Significant interest in proactive investment strategies to impact positive change

Sustainable investing has grown significantly in liquid markets in recent years, so a rise in attention within private markets was inevitable. The much greater proximity that private asset investors have to their portfolio holdings means positive change can be delivered with precision, and with visible, real-world results. When asked about the importance of ESG considerations within private assets, 54% cited that ESG strategies which have a ‘benefit all stakeholders’ principle’ at the heart of their investment process are the most appealing, followed by the need for managers to report quantitively on the impact of an investment strategy (50%).

%

The strategy focuses on assets with strong or improving sustainable practice

%

Manager’s ability to report quantitatively on positive/negative impact of investment strategy

%

Manager integrates ESG considerations into the strategy

This year’s Study shows a significant demand for investment strategies proactively working to foster positive change. The way forward is clearly to excel in the measurement and reporting of impact and the implementation of best practices in the investment process. The time of nice pictures and anecdotal evidence in annual reports has clearly gone and regulatory requirements are also demanding a higher level of transparency when referring to sustainable and impact investing strategies.

Maria Teresa Zappia Head of Sustainability & Impact, Schroders Capital and Chief Impact and Blended Finance Officer, Deputy CEO, BlueOrchard