2022 confirmed that “the tailwinds of the past decade are unlikely to return soon”; rising interest rates and rapidly growing inflation added to the issues of private markets, leading investors to be more cautious, says State Street. A global study of responses from 480 participants--private markets managers, insurers, asset owners and managers--shows that, despite this, “the private markets space looks positive.” This rings even truer for European investors.
Indeed, 69% of European respondents “plan to continue their allocation to private markets in line with current targets, despite acknowledging that interest rate rises reduce the attractiveness of the highly leveraged asset class,” reads a statement. This is marginally higher than global results (68%).
Focus on ESG factors, cloud-based data
European participants (57%, against 63% of global respondents) expect that, over the next two or three years, their largest allocation would go to private equity, followed by infrastructure (56%).
“Our survey finds that European institutional investors show a strong degree of confidence in private markets […]. Moreover, a strong majority believe that tougher times will create opportunities to buy assets at a discount,” said Riccardo Lamanna, country head for Luxembourg at State Street in a statement.
It is critical for institutional investors to have a multi-asset class risk analytics platform to gain a holistic view of the ESG drivers that impact their overall portfolio in both private and public markets.
More than two thirds of European investors also plan on investing more in cloud-based data storage and analysis to improve performance. The study namely found that only 34% of European respondents deemed this aspect of their firm well-developed enough--a sentiment echoed by their global counterparts (38%). Automation and robotics came second (38%) in efforts to maximise the potential of data in their activities.
The implementation of stricter ESG reporting regulation, through the Sustainable Finance Disclosure Regulation (SFDR), also impacts European investors at the start of 2023. Institutional investors expect ESG to become one of the key points in private market transparency checks.
Though only 37% said their quantification of ESG risk exposures were well-developed, 46% of them agreed that private markets present a better opportunity to make a difference through ESG. On this, Lamanna said: “It is critical for institutional investors to have a multi-asset class risk analytics platform to gain a holistic view of the ESG drivers that impact their overall portfolio in both private and public markets.”