Despite doubts on retail, private market allocations primed for growth

State Street has released its third annual private markets survey, highlighting that despite macroeconomic challenges, institutional investors are poised to increase their stakes in private markets significantly over the coming years.

The survey included insights from 480 institutional investors across North America, Latin America, Europe, and Asia-Pacific, including asset managers, insurance companies, and asset owners.

The study indicates a continuing trend of shifting from public to private assets within portfolio allocations. More than a third of institutions (36 percent) have already allocated over half of their portfolio to private markets, a number expected to rise to 41 percent within the next three to five years. Additionally, 59 percent of institutions have allocated at least 30 percent to private markets, with projections reaching 71 percent by 2028.

"The great rotation from public to private markets is not slowing down, with investors set to allocate more to private assets than ever before," Donna Milrod, executive vice president and chief product officer at State Street, said in a statement.

"This increasingly sophisticated private market universe means the current economic environment, coupled with investors’ desire for wider, more diverse avenues of capital, is making private markets attractive now and for the foreseeable future."

The survey found broad skepticism about the accessibility of private markets for retail investors, with 54 percent of respondents feeling that current investment products do not adequately serve this demographic. Nonetheless, nearly half (49 percent) recognized a strong demand among retail and defined contribution investors for private market access, driven by potential legislative changes.

Infrastructure and private debt were identified as particularly appealing asset classes, with 71 percent of investors planning to increase their allocations within two years. Meanwhile, private equity is expected to regain popularity over the longer term, with 73 percent intending to boost investments in this sector over the next three to five years.

In the face of inflation concerns, 61 percent of respondents believe that inflation has peaked in their local markets, though most do not expect it to return to central bank target ranges soon. Moreover, 58 percent reported that macroeconomic challenges are complicating fundraising efforts, causing delays of up to a year or more.

"Overall, while demand for private market assets continues to grow, investors are also experiencing a tightening supply of quality deals and express that borrowing costs can be an issue for them," noted Scott Carpenter, global head of Private Markets & Credit at State Street. "Central bank decisions on rates and the state of inflation will heavily influence opportunities and investing behaviors over the next couple of years."

Nearly 80 percent of institutions are seeking a centralized platform for both public and private asset data to overcome the challenges of data availability and accuracy. Against that backdrop, many institutions shared optimistic view on the impact of AI, including 43 percent of respondents believing in machine learning's potential to enhance operations and 58 percent in favor of generative AI's capabilities in the sector.