Private markets allocations by global institutional investors have risen to 12.5% of overall portfolios, reaching a new high, according to data from Aviva Investors.
The picture is uneven across markets, with insurers and defined contribution (DC) schemes continuing to build exposure, while European institutions are showing signs of maturity, with a high proportion already at target allocations – according to the manager’s latest annual Private Markets Study, which surveyed 500 global institutional investors across Europe, the US and Asia-Pacific.
With DC now representing 59% of total pension assets in the seven largest pension markets, Aviva Investors’ latest research found that 72% of DC funds globally agree that adding private market assets to accumulation portfolios “will deliver better performance outcomes for members”.
Where DC funds have added private market assets to their default funds, real estate (59%), private debt (48%) and private equity (43%) are the most popular asset classes to have been incorporated.
This year’s study also found that 88% of global institutional investors plan to increase (49%) or maintain (39%) private markets allocations over the next two years, with 76% expecting private markets returns to outperform public markets over the next five years, up from 73% a year ago.
More than three-quarters (76%) of those surveyed state “diversification of risk and returns” as being a primary reason for allocating to private markets, alongside “the presence of an illiquidity premium” (55%), where investors are compensated with higher returns to reflect the increased illiquidity of an investment.
David Hedalen, head of private markets strategy and research at Aviva Investors, said: “This year’s study shows the increasing importance of illiquidity premia as a major factor for investors allocating to private markets, with 55% of global investors viewing it as a driver, up from just 25% in 2023.
“Investors in private markets are increasingly leveraging better data to calibrate models and make more informed decisions and illiquidity premia forms part of this conversation.”
He added: “Becoming more confident in this reward for having increased illiquidity in portfolios will drive investor confidence that these assets can generate improved returns over the long run. We think this helps to explain why it is fast becoming a central pillar for allocating to private markets.”
Hedalen noted that real estate equity “remains the dominant destination” for global institutional investor capital in private markets, “with its familiarity, scale and depth, continuing to underpin its prominent role in institutional portfolios”.
Within private debt, respondents from all three regions view asset-backed lending (49%), alongside opportunistic and distressed debt (48%), as the sub-asset classes where they expect to find the most attractive risk-adjusted returns over the next two years.
Hedalen said: “As the asset class continues to mature, it is important asset managers guide and educate institutional investors through the increasingly nuanced and bespoke strategies on offer and how best to access these investments, to ensure there continues to be strong alignment with long-term investment needs. Ultimately, we see a strong case for strategies such as multi-sector private credit for this reason, which can pivot across sectors and capital structures as relative value shifts.”
The study also found increased investor enthusiasm for co-investment opportunities from institutional investors of all sizes.
“We think this is a significant finding. Not only does it suggest demand for better access to larger opportunities, but it could also highlight the desire to have greater control of portfolios at an asset-specific level and capturing opportunities that allow an increasingly tailored approach to risk and return metrics, liability profiles, as well as other non-financial outcomes, such as regional preferences,” Hedalen concluded.
