Investor allocations: Mixed signals for private markets

Two surveys provide evidence of a mixed outlook for private debt among LPs.

Family offices are strongly favouring private markets over public markets, according to a survey from Moonfare, a digital private equity platform, and Global Partnership of Family Offices, a UK-based association.

It found 50 percent maintaining a positive outlook for private market assets, while 70 percent hold a negative view of public market assets. Higher risk-adjusted returns was cited as the main reason for investing in private markets by 80 percent of those surveyed.

This contrast also extends to family office allocations, with 60 percent saying they had increased their allocations to private markets over the past two years, while half said they had reduced their exposure to both public equity and fixed income over the same period.

“Inflation has reached levels many have not experienced before, and 60/40 stock-bond portfolios are down by almost 20 percent,” says Steffen Pauls, Moonfare founder and chief executive officer. “Our results show that many family offices have been quick to adapt to current macroeconomic conditions, while keeping an eye trained on emerging opportunities.”

A bfinance snap poll in October, by contrast, showed other types of institutions shifting back to fixed income and away from private markets. The poll found 80 percent of UK corporate pensions looking to reduce their private markets exposure over the next 18 months, with 60 percent planning to increase the proportion of fixed income.

The poll found 24 percent of all UK investors expecting to reduce their private markets exposure over the next 18 months, compared with an equivalent figure of 4 percent for the previous month. Over the same period, those expecting to increase their fixed income exposure increased from 25 to 29 percent.

For UK corporate pensions, 80 percent were expecting to reduce their private markets exposure over the next 18 months, with 60 percent expecting to increase their fixed income allocation.

This trend is mirrored in private debt. In early to mid-September, more than 40 percent of all UK investors were looking to increase their private debt allocations over the next 18 months, with around 20 percent looking to decrease them. By the time of the October poll, less than 30 percent were planning an increase, compared with around 35 percent planning a decrease.

Improved funding

The changes come amid a background of UK pensions improving their funding positions. Asked about their asset-liability balances (funding ratios), 56 percent of UK corporate pensions said these were getting better in mid-October, compared with 47 percent of UK corporate pensions and 40 percent of global investors in September.

A subsequent bfinance Global Asset Owner Survey found 52 percent of investors expecting to raise their private market exposure over the next 18 months with only a “very modest” positive swing in favour of fixed income driven by higher interest rates and de-risking.

Although 87 percent of respondents said they were concerned inflawtion and rising interest rates will impair their ability to achieve investment objectives, only 43 percent had recently made, or were about to make, changes to increase the inflation sensitivity of the portfolio. Only 17 percent said they would take such action over the coming 18 months.

Nearly half of investors (49 percent) are not concerned about the denominator effect, whereby large declines in public markets have resulted in over-allocations to private markets, as they were prepared to wait for the dislocation to end. This was as high as 75 percent for family offices, endowments, foundations and sovereign wealth funds.

“The investment strategies that may provide the greatest resilience in a climate of inflation and rising rates may also be more vulnerable in a climate of recession and higher defaults, and vice versa,” said Kathryn Saklatvala, head of investment content at bfinance.