Private assets have increasingly become a focal point for insurers and investment managers, driven by the quest for higher risk-adjusted returns and diversification.
Despite recent challenges such as rising interest rates and an uncertain macroeconomic environment, the outlook for private assets is optimistic.
This shift is underpinned by the potential for income generation and inflation hedging, making private assets a compelling choice for those willing to accept illiquidity in exchange for significant returns.
Current Trends in Private Assets
The landscape for private assets is evolving, with insurers showing a marked interest in higher-risk opportunities.
According to a recent survey by Ortec Finance, 70% of global insurers are now seeking higher-risk alternatives. 54% of respondents expect a moderate increase in private assets exposure, while 16% anticipate a dramatic rise.
Direct real estate and infrastructure projects are particularly attractive, with 41% and 33% of respondents, respectively, planning to increase their investments in these areas. Additionally, 4% are considering farmland and timberland due to their inflation-hedging properties and low correlation with other asset classes.
The quest for income-generating assets is a prominent theme, with infrastructure debt and direct real estate debt standing out for their liability-backing characteristics.
Amid geopolitical tensions and inflationary pressures, investors are preparing for an era of persistent inflation.
Infrastructure, with its ability to generate long-term, inflation-adjusted cashflows, is a natural choice.
Environmental, social, and governance (ESG) considerations are also driving investments, particularly in sustainable projects aligned with climate transition goals.
Factors Driving Investment in Private Assets
Several key factors are driving the increased allocation to private assets. According to Ortec Finance’s survey, 56% of respondents cited attractive risk-return opportunities as a primary motivator.
Investors are willing to accept illiquidity to achieve significant edges in high risk-adjusted returns, as highlighted by Yale endowment model pioneer David Swensen.
The quest for income-generating assets is another significant driver. Infrastructure debt and direct real estate debt are particularly appealing due to their liability-backing characteristics.
Amid ongoing geopolitical tensions, deglobalization, and inflationary pressures, investors are preparing for an era of persistent inflation. Infrastructure projects, with their ability to generate long-term, inflation-adjusted cashflows, are a natural choice.
Regulatory Challenges and Considerations
Navigating the regulatory landscape is a significant challenge for investment managers in the private assets sector.
The Prudential Regulation Authority (PRA) in the UK is adapting the Solvency II framework, with a focus on expanding asset eligibility to include those with highly predictable cashflows.
This aligns with the UK government’s aim to support long-term capital investments in infrastructure and other productive assets.
However, regulatory complexity remains a key obstacle, particularly in Europe. According to research from Carne Group, 78% of US managers find EU regulations more complex than their US counterparts, and 68% believe navigating these regulations will become even harder.
UK managers also identify the regulatory environment as the greatest challenge to successful fundraising and fund launches.
Sustainability regulations add another layer of complexity. While strong ESG credentials drive growth, 77% of managers see ESG regulation as a deterrent to participating in European markets, necessitating robust governance frameworks to manage these challenges effectively.
Risks and Risk Management in Private Assets
While private assets offer compelling opportunities, they come with inherent risks that require careful management.
Reduced demand in the private equity market and decelerated exit activity can prompt insurers to seek buyers in the secondary market at unattractive levels.
Additionally, ratings agencies have downgraded some prominent funds due to non-accruals in a higher interest rate environment.
Direct investments in infrastructure and real estate also present specific risks, including the potential for greenwashing.
Effective risk management principles and a robust governance framework are essential to navigate these challenges and capitalize on the benefits of private assets.
Conclusion and Future Outlook
The future of private assets appears promising, with insurers increasingly embracing a risk-on approach despite global uncertainties.
Asset classes such as direct real estate, infrastructure, and private debt offer compelling investment opportunities with favorable risk-adjusted returns.
By exercising prudent risk management and weighing benefits against costs, private assets can play a pivotal role in strategic asset allocation.
As regulatory frameworks evolve and sustainability considerations gain prominence, the ability to navigate these complexities will be crucial.
Overall, private assets are well-positioned to support insurers in achieving their long-term investment goals amid evolving macroeconomic conditions.
