Shrinking Market Opportunity Spurs Interest in Private Investments for Enhanced Returns

February 3, 2022 — Boston

As investors face lower return expectations in 2022, research participants expect private investments will see increased flows

New research from Cerulli Associates and Russell Investments finds that many investors plan to move their portfolios up the risk spectrum by allocating to private investments in 2022. The research, Seeking Future Returns, was compiled from interviews conducted in the third quarter of 2021 with large institutional asset owners and asset managers. The resulting study also leverages data and insights from Cerulli’s existing suite of research.

Institutional investors with existing allocations to private markets are looking to expand from traditional private equity into growth and venture capital. “The current investing environment is characterized by complexity and shrinking opportunity,” states James Tamposi, associate director, Cerulli Associates. “With rates at all-time lows and valuations at all-time highs, institutional investors are faced with a complex decision of where to deploy their portfolios. Private investments offer an avenue through which investors can, to an extent, maintain return targets,” he comments.

In parallel, asset managers anticipate that mandates will change. According to Cerulli research, 80% of asset managers expect increased demand for private equity mandates and 75% expect demand for other private investment mandates. Current income (92%), diversification (85%), growth/enhanced returns (77%), and volatility dampening (54%) are the top objectives managers of private investment strategies seek to fulfill for investors.

Superior performance of private investments is credited toward illiquidity premiums. Research participants explained that illiquidity falls short as a descriptor for private investments’ source of outperformance, with one saying that premiums derived from private investments would be better described as “complexity” and “access” premiums. Participants further expanded on differentiating characteristics of private investment strategies, saying that they offer investors the chance to add value at an early stage, provide potential tax benefits, and shield against volatility. “Many portfolios benefit from the smoothing effects of private investments. Because these investments are not marked to market but are instead marked at book value, having them in a portfolio helps limit volatility,” says Tamposi. However, liquidity has drawbacks for different types of investors. Several participants agreed with this notion, while others said that private investments’ stability made the asset class “artificially attractive,” noting that private equity is subject to many of the same market risks as public equity.

Despite the relatively strong growth in recent years, research participants believe private investments are not exempt from the lower-return outlook of other asset classes. Increased industry competition (93%), increased volatility of valuations (92%), and a lack of exit environment (75%) were cited as significant risks by firms participating in a 2021 Cerulli survey. Several research participants asserted that as investors continue to seek returns and increase allocations to private investments, the space has become more crowded and managers in the space will be forced to accept lower-yielding investments. In other words, because there is so much committed capital and firms must continuously look for ways to put this capital to work, firms may have to make deals with lower payouts.

Founded in 2021, Russell Investments’ 10x10 Partner Innovation Lab is a discussion of perspectives among 10 institutional asset owners and 10 asset managers.

  • Institutional asset owner participants include: Fujitsu Global, Mazda Motor Company, Microsoft, Mitsubishi Electric, Nestle, Roche, Robert Wood Johnson Foundation, The Boeing Group, The New York Presbyterian Hospital, Thomas Jefferson University, Unilever
  • Participating asset managers include: BlackRock, Brevin Howard, Hamilton Lane, Oaktree Capital Management, J.P. Morgan Asset Management, Morgan Stanley, Putnam Investments, RBC Global Asset Management/BlueBay Asset Management, Wellington Management, Western Asset Management Company

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Note to editors

These findings and more are from Cerulli-Russell Investments 10X10 Part Three: Seeking Future Returns.

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