Evening Brief – 10.23.23
LPs Seek Opportunities in Private Assets
US institutional investors are increasingly looking to private assets opportunities to invest sustainably, research from global asset manager Schroders revealed.
A survey of 200 institutional LPs in North America managing more than $7 trillion in assets revealed that nearly a third intend to increase their allocation to private assets over the next two years.
Principal benefits cited include diversification advantages, lower volatility, and the potential for higher returns than the public markets.
Investors were most interested in increasing allocations to infrastructure investments, with 42% intending to do so within the next 12 months.
US investors were broadly confident of achieving their return expectations over the next two years: 54% were somewhat confident, while 45% were confident or very confident, with just 4% saying they were not confident at all.
Negative factors included geopolitical uncertainty (54%), tapering of monetary policy (45%) and rising inflation (44%).
When asked about some of the key investment themes investors want to allocate to through private assets, 49% of participants listed the technological revolution, followed by 39% seeking to proactively allocate to private investments tied to the energy transition.
When it comes to investing in sustainable and impact strategies, active ownership and engagement, as well as impact investing, ranked highly as preferable private asset investment approaches.
Nearly 25% of investors indicated that actively engaging with portfolio companies and borrowers to ensure achievement of impact targets was the most effective method to ensure positive and measurable impact in private assets investing.
According to Schroders, however, obstacles persist, such as the limited track record of both financial and sustainability performance of funds and mandates (63% of respondents cited this as an obstacle) and the weak sustainability and impact measurement practices of asset managers and investee companies (51%).
Despite ongoing debates about the role of ESG in portfolios, US investors continue to see value, according to the report. Three-quarters of U.S. investors cited the need for long-term financial returns as one of the top three reasons for investing in sustainability and impact strategies.
About 66% of investors cited a desire to diversify into new sectors, such as nature-based solutions and green hydrogen.
Corporate governance, followed by human capital management (53%) and human rights (53%) was regarded as the most essential issue for investors in terms of active ownership across all regions.
Nick Thompson, head of private asset sales, North America at Schroders, said, “Amid continued volatility and geopolitical uncertainty, investors are looking for opportunities for diversification and returns that align with trends shaping global markets.”