Evening Brief – 03.26.24
New Market Regime
Over 50% of institutional investors intend to increase their allocations to private market strategies in the coming years, but the perceived necessity for risk management is dragging on LP portfolios.
Nuveen, TIAA’s investment management arm, polled more than 800 investors for its fourth annual EQuilibrium global institutional investor survey, which, together with other client engagements, has gauged how $18 trillion in assets will be used and managed in the coming years.
Investors continue to allocate to private markets, with 55% expecting to raise allocations over the next five years. The trend, however, is less evident than in last year’s study, when 72% expected to expand into private markets.
Some investors intend to raise their allocations to private real estate (24%), commodities (22%), hedge funds (21%), private placements (19%), timberland, and farmland (all 12%).
Private credit and private equity were rated the most appealing asset classes by investors aiming to diversify, headed by North American public pensions (57% plan to increase private credit) and Japanese investors (59% plan to grow private equity).
The drop in conviction coincides with a growing wave of de-risking, with over 66% of investors believing we are in a new market regime that is redefining how they manage risk and reward.
According to the survey, eight out of ten investors feel we have passed the era of ultra-low interest rates and are now entering a higher-for-longer climate.
“Three clear themes are dominating investors’ focus as they position portfolios in the new regime,” said Mike Perry, head of Nuveen’s global client group. “First is the huge appetite for exposure to energy innovations and infrastructure projects as the energy transition plays out. The second is private credit and private equity being prioritized among growing allocations to alternatives.”
“Lastly, as a way to position themselves to take advantage of these timely opportunities, investors are holding portions of their portfolios in higher-quality, liquid fixed income instruments.”
Almost 90% of investors are focused on the energy transition in some way, Nuveen said. The smallest group, representing 9%, are first movers in the transition. The largest cohort (37%) is “keeping pace,” structuring portfolios to reflect the current energy mix in the economy, while 23% are “getting started” and 19% are doing what is needed to meet regulatory requirements.
“Investors clearly understand their influence and see government policy and technical innovation as the biggest tailwinds for investments in the energy transition for the year ahead,” Perry said.