More than 60 large asset owners (LAOs), with combined assets of over $2trn, plan to increase their allocation to private markets over the coming year, with half pivoting to infrastructure and sustainable strategies despite concerns in some countries around ESG investing and overvaluation of certain private market asset classes, according to Mercer’s inaugural 2024 Large Asset Owner Barometer.

The research surveyed 61 organisations across the globe, each with global assets under management (AUM) of more than $5bn as of 30 July 2023, about their views on the key risks and opportunities in the coming year.

The report reveals that the LAOs surveyed “continue to invest for the long term and feel confident their portfolios are well positioned to withstand shocks over the coming year, remaining resilient to a range of issues such as stagflation, geopolitics, and volatility in public markets”.

Eimear Walsh, head of investments, Europe, at Mercer, said: “Despite an uncertain market outlook, this category of investor is confident in the resilience of their portfolios, which has positive implications in relation to demand for risk assets.”

However, while LAOs expressed an interest in increasing their allocations to private markets, how to navigate them is a chief concern. Mercer’s research found that “LAOs who do not have exposure to such asset classes cited complexity and illiquidity around the asset class for their apprehension”.

Additionally, only 18% of LAOs manage private market investments in house, with the majority opting to outsource management of this resource intensive asset class.

Rich Nuzum, executive director, investments and global chief investment strategist, at Mercer, said: “Large asset owners have a clear understanding of what they do well in house and where they benefit from external expertise.

“Nearly half (41%) of [those] surveyed say they prefer to outsource investment management entirely. With LAOs planning to add to their positions in private equity, private debt and infrastructure in the next year, the trend towards outsourcing could accelerate. According to the survey, back and middle-office risks, such as those relating to governance, operations, talent and regulation, are also in significant focus.”

The survey data suggests the world’s biggest pools of capital are cautious that the outlook may be challenging for US equities, UK equities and real estate – and are planning to decrease their exposure in the coming year. Whilst some pension funds may be moving out of equities generally as part of a de-risking pathway, this trend also indicates concerns around valuations in these asset classes, Mercer added.

Despite some negative headlines around ESG investing, the report also highlighted that half (50%) of LAOs surveyed are set to increase their allocation to sustainable investment strategies, with 8% set to “significantly increase” allocations.

Mercer’s survey found that LAOs are still in the relatively early stages of setting climate targets, “but momentum is building”. While 55% of LAOs have set climate transition targets, only 29% have actually implemented them, the research found.

Organisations are also more likely to take a long-term approach to their climate objectives; 47% of the LAOs surveyed have set a 2050 science-based net zero target, versus 5% that have set a 2030 target.

Walsh added: “Large asset owners are an influential category of investors. By understanding their management and governance decisions, our clients can be better informed to make decisions about their own portfolios.”

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