Investors tap private assets in prime economies for diversified gains
Study of 250 allocators in EMEA representing $10tn AUM reveals geographic preferences of institutional allocators: Download the research here.
Institutional allocations to private market assets are expected to increase among investors in Europe and the Middle East amid growing concern for geopolitical risks and spikes in market volatility, according to new research from PGIM and Institutional Investor’s Custom Research Lab. Data from the PGIM/II study, What’s Your Alternative? found that private alternatives currently make up approximately 25% of the portfolios of the 250 institutions from the EMEA region surveyed in the study, which in total manage approximately $10 trillion in assets. Among study participants, more than 75% plan to increase their allocations to private alternatives over the next two years.
Geopolitical and market risks are top of mind among study participants, as a solid majority – 58% – anticipate geopolitical risks to become more acute in the years ahead. Their concern is likely to be tied to uncertainty about the tariff and trade policies of the new administration in the United States and the prospect of military conflict in Eastern Europe, the Middle East, and elsewhere, along with the lingering effects of the monetary response to the global pandemic.
Investors in the study are especially interested in investing in private markets in Asia-Pacific and Europe.In aggregate, 64% of respondents anticipate increasing holdings in the developed markets of Asia-Pacific. A solid majority of respondents – 61% – expect to augment holdings of private assets in the emerging markets of Asia-Pacific.
Asia Pacific and Europe are preferred destinations for capital, while investments in LatAm and China are likely to wane in the next two years.
Thanks to its high economic growth potential and strong demand for infrastructure funding, the Asia-Pacific region is poised to attract substantial investment from institutions around the world. Institutions are well positioned to fill the $1.7 trillion funding gap in the region’s infrastructure financing requirements identified by the Asian Development Bank as required to maintain economic productivity.This funding shortfall is unlikely to be filled by public financial markets and offers further opportunities for institutional investor participation through private debt and equity placements.
Enthusiasm is also high for investment in Europe, as nearly 60% of respondents plan to increase their allocations in the emerging and developed economies of Europe over the next two years. Similarly, a majority of survey respondents (55%) expect to increase their allocations to private assets in the United Kingdom over the period.
Investors in the study are less sanguine about the private markets of China and Latin America. Across the full sample, 43% of respondents expect to reduce their holdings in China in the years ahead. Investors’ reduced appetite for Chinese assets is likely due to the recent economic slowdown in the country, the threat of increased tariffs and trade tensions with the U.S., and growing anxiety about the prospect of conflict between China and Taiwan.
The PGIM /II study captures the views of 250 investment decision-makers throughout Europe and the Middle East. Investors’ preferences for increased allocations to various categories of private assets are highlighted below:
The United Kingdom: Study participants from the UK are most likely to increase allocations to real estate debt over the next two years, as 52% anticipate increasing their allocation to the asset class in the next two years. The UK also scored the highest – 48%, versus a study-wide average of 34% – for potential investments in debt and equity investments focused on impact/sustainable objectives.
The Netherlands: Dutch investors are leading the charge in private equity allocations. Nearly half (49%) of respondents from the Netherlands plan to increase their private equity holdings over the next two years, surpassing the 38% average among all survey participants. Interest in private infrastructure debt is also gaining traction, driven by domestic institutional investors responding to recent pension reforms and an increasing appetite for private alternative investments.
Germany: German respondents are the most likely among their peers to increase holdings of private corporate credit (62%, versus 44% of all participants) over the next two years. Investors in Germany also view private credit as an area where they can adopt a more active approach as banks have reduced lending to small and midsize enterprises in recent years. German investors also scored the highest across geographies for investing in agriculture equity investments due to their growing desire for sustainable investments.
Switzerland: Swiss investors have the greatest appetite for private infrastructure equity allocations across geographies in the survey (44% increase vs. 28% for all respondents). While Swiss institutional investors tend to have a higher allocation to tangible assets like real estate and infrastructure compared to other countries, recent regulatory changes have supported further infrastructure investments. In 2020, the regulator allowed Swiss pension funds to allocate up to 10% of their total assets under management to the infrastructure sector and now recognize it as a stand-alone asset class.
France: French respondents rank dedicated impact/sustainable equity as the highest sector for increased allocations across geographies in the study over the next two years (57% increase vs. 40% for all respondents). France has a strong tradition of sustainability, both in public and private markets, and French investors are increasingly considering the importance of ESG in their investment decision making. French investors also ranked infrastructure debt the highest across geographies for future investments.
Middle East: Increased holdings of debt investments topped preferences among investors from the Middle East, as 43% of respondents from the region anticipate increasing their holdings of the asset class. Investing in private infrastructure debt is a high priority for Middle East investors, only ranking behind France among its geographical peers. The region’s policymakers are increasingly looking to build up social safety nets for a relatively young population and infrastructure debt is viewed favorably from a return perspective and improved liquidity profile.
Find out more: Access the full research report.
This is the second of three articles on the use of private market alternative assets among investors in Europe and the Middle East. In the weeks ahead, look for further discussion of private alternatives and investors’ preferences when selecting asset management partners for private market allocations.