Corner Office Views | Q2 2023
Europe and Private Assets
Asset owners will continue to diversify through private assets in 2023
Key Points
- Despite a significant drop in fundraising activity in Europe, private asset growth continued in 2022, albeit at a slower pace than previously; private equity continued to represent the largest share (60%) of total assets.
- 73% of European insurers Cerulli surveyed plan to boost their allocations to infrastructure debt over the next 12 to 24 months, while a slightly lower proportion (65%) of pension funds plan to do so.
- Rebalancing remains a challenge that alternative asset managers face, but the consensus is that the denominator effect is yet to have a substantial affect.
A positive year for private assets
2022 proved to be another positive year for private assets as whole, and Cerulli’s view is that this is set to continue into 2023. The tailwind of the “denominator effect” has seemed to not materialise and investors have a good deal of incentive to seek diversification using private assets over the coming 12 months. Research from our recent report, European Alternative Investments 2023: Helping Investors Diversify, paints an optimistic picture for private asset allocations by European institutional investors in 2023.
Despite a significant drop in fundraising activity in Europe, private asset growth continued in 2022, albeit at a slower pace than previously. According to PitchBook, Europe based private investment managers saw their assets under management (AUM) increase by 6.7%, to total of €2.3 trillion (US$2.5 trillion), by the end of 2022, markedly down on the 24.6% increase in AUM in 2021. Most notably, private equity continued to represent the largest share (60%) of total assets.
Areas of demand
As we look toward the future, the majority of institutional investors that remain well under allocated to private equity will continue to invest across growth, buyout, and, increasingly, secondaries over the next 12 months. In fact, 59% of insurance companies and 52% of pension funds surveyed by Cerulli plan to increase allocation to private equity over the next 12-24 months. However, demand for private equity sub-asset classes will be uneven in 2023. Sector-specific private equity funds (e.g., healthcare) as well as funds that have a strong focus on sustainability and climate change will gather most moment. In addition, our research indicates that European insurers will be more interested in mid-market buyout funds than venture capital or growth funds (see European Asset Owners Anticipated Increase in Allocation for Selected Private Investment Strategies Over the Next 12–24 Months, 2023). Nonetheless, despite a continuing demand for private equity, Cerulli anticipates a quieter year for private equity managers in 2023. This will see some investors, especially larger institutional investors, planning to reduce some of their exposure to private equity and skip re-ups.
We anticipate significant demand for infrastructure strategies from both, insurers and pensions, but appetite for infrastructure debt will be much stronger from insurers than pension funds. 73% of European insurers Cerulli surveyed plan to boost their allocations to infrastructure debt over the next 12 to 24 months, while slightly lower proportion (65%) of pension funds plan to do so.
Although real estate is one of the most widely used private asset classes, it will become less preferred asset classes over the next 12-24 months. Despite investors’ concerns about real estate values, our survey of European institutional investors indicates that 54% of insurers and 44% of pensions will continue to search for opportunities in real estate over the next 12-24 months, though most likely they will focus on residential and logistics real estate markets. As insurers are very familiar with this asset class, they will continue to search for opportunities once real estate prices come down and look to make instatements at very attractive yields.
Lastly, demand for private debt will be much stronger from insurers; 49% of European insurers surveyed by Cerulli plan to increase their allocation to private debt, while only 39% of pensions funds will be looking to raise their allocation to private debt over the next 12-24 months. Within the private debt space, private placements will be most in demand; 67% of insurers who plan to increase allocation to private debt will do so by allocating more to private placements.
Denominator impact on future allocation
The denominator effect and the impact it could have on rebalancing for some European institutional investors could potentially cause issues for the private assets industry. During our conversations with alternative asset managers, rebalancing remains a challenge they face but the consensus is that the denominator effect is yet to have a substantial affect.
Despite concerns about investors’ overexposure to private assets due to the denominator effect, Cerulli’s research indicates that most investors remain well under allocated to private assets and so will continue to expand their private asset programs. Notably, one asset manager Cerulli spoke to pointed out that outperformance by private assets will help motivate asset owners that do not currently allocate to private assets.
By the beginning of 2023, many investors had not taken any immediate action but rather postponed some of their investment decisions for later. Furthermore, Cerulli expects investors that have sufficient flexibility to keep their aggressive allocations to private assets and will start to look for distressed opportunities in the market.
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