Institutional allocations to private markets to rise again in 2021, finds Commonfund investor survey

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Institutional investors are planning to increase allocations towards private markets in 2021, with a particular focus on small and medium-sized US private equity funds as well as venture capital, secondary and co-investment funds, according to Commonfund Capital’s fourth annual private markets investor sentiment survey.

Private markets have grown dramatically in recent years, with data from Preqin showing that the value of private markets has tripled since the Global Financial Crisis in 2008, from USD2.5 trillion to USD7.7 trillion in 2020.

Growth was further fuelled last year by coronavirus-related volatility in public markets and by central banks slashing interest rates, which has driven investors to search for yield outside of the public bond markets.

US-based asset management firm Commonfund Capital surveyed 400 institutional investors and advisors with USD725 billion in total assets, and found increases in investors’ overall planned allocations to private market strategies. 

Within private markets, investors ranked US private equity as the asset class with the highest performance potential for commitments made during this cycle, with 58 per cent indicating above average or high return potential from the asset class. 

Small and medium-sized US private equity funds were also the most common category for investors planning to increase their allocations, with 40 per cent of investors saying they will direct more money toward sector-specialist buyout funds, and 33 per cent for generalist funds. 

Investors also favoured venture capital for returns and allocations, with 38 per cent planning to boost allocations and more than half expecting above average or high return potential. Secondaries and co-investments were also ranked as favourites for increased allocations.

Almost a quarter of investors indicated an upward trend for private equity-styled environmental sustainability allocations, but there was an overall reduction in private natural resources and energy offset allocations.

Commonfund says that a rising number of investors are “seeking more attractive returns in the private markets as opposed to the public markets this cycle”. 

“It is the point of view of many investors that more active management may contribute not only to returns this cycle but may also serve as risk management factor to more passive, beta elements of their total portfolio,” comments Commonfund’s managing director, Ralph Money.

Nevertheless, the survey found that over half of investors were concerned over higher prices in private markets.

Money says: “We share these concerns, which help to inform our investment point-of-view and portfolio positioning. We have observed better pricing in the smaller end of the market, and, as a result, our private equity portfolios have a distinct tilt toward small and medium sized-funds that are focused on smaller companies.”