Despite high inflation and interest rates reducing the appeal of the highly-leveraged private markets asset class, over two-thirds – 68% – of institutional investors plan to continue growing their allocations, according to new research from State Street Corporation.

Within this sector, private equity remains the most attractive asset class: 63% of institutional investors anticipate making it their largest allocation over the next two to three years.

In contrast, 43% of investors are least likely to make private credit their largest allocation.

The study, conducted by CoreData Research, covered 480 respondents from traditional asset managers, private market managers and asset owners across North America, Latin America, Europe and Asia Pacific in September to November 2022.

Regarding future intentions, respondents plan to focus more on deal quality, with 47% making changes to their due diligence processes, and 42% narrowing the universe of investments they will consider through higher baseline standards.

Paul Fleming, global head of alternatives segment at State Street, said: “The tailwinds of the last decade may be gone, but it is clear that private markets remain attractive. Our survey finds that three-quarters of respondents think tougher economic conditions will create discounted opportunities, but investors are likely to bide their time, as at least half feel valuations have not yet fully adjusted. Dry powder will become invaluable in the next couple of years.”

However, private markets data management remains a huge challenge, with over half (53%) of institutions wasting resources because of manual processes and outdated systems.

But the survey found maximising the potential of data to make more effective decisions is the greatest focus for institutional investors, and migrating data storage and analysis to the cloud is their top priority, with 71% of respondents investing in it.

Fleming said: “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. On top of efficiency, 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.”

Meanwhile, in the current volatile climate, private market investments can deliver as a core solution for portfolios, according to Private Markets Outlook 2023, a study from PM Alpha, the institutional quality investment platform.

“With ever-increasing recessionary risks following on from Europe and now North America coupled with concerning inflationary pressures globally, we believe a major (re)balancing act would benefit investors’ portfolios”, the report said. “Private markets are well-suited to this type of backdrop, given a broad range of different return drivers.”

The report said the breadth of available opportunities is greater than in public markets; allocating to private markets in volatile times leads to some of the best investment returns these markets can deliver; and given the longer time-scale for spending capital, managers’ ability to exploit market dislocations is increased.

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