Analysis: UK investors led the charge to real assets and private markets last year as interest in alternatives remained high, despite warnings that macroeconomic pressures could have a negative impact on certain alternative asset classes.
MandateWire data show that real assets, namely property and infrastructure, attracted more than half of all expressions of interest* in alternatives up until November 15 2022.
Property and infrastructure were almost equally sought-after investments among European investors, with property attracting a total of 48 expressions of interest against 45 in infrastructure.
UK asset owners were the most active investors seeking inflation-linked investment opportunities in real assets, with 38 per cent of all expressions of interest in real assets coming from this group, followed by Italian investors (30 per cent) and Dutch investors (10 per cent).
Despite UK investors tracking the highest number of expressions of interest in real assets, a single investor in France issued the largest real asset manager search.
In January, MandateWire reported that the €41.9bn (£36.8bn) Établissement de Retraite Additionnelle de la Fonction Publique was looking for managers to handle its environmental, social and governance-focused property portfolio. Specifically, the pension fund was seeking managers to look after domestic and European real estate mandates worth a total of €5bn.
Mixed outlook for property
With demand for real assets remaining high in Europe, industry experts speaking at the FT’s Future of Asset Management Europe conference in November noted that the outlook for real assets such as property is mixed.
Jim Garman, head of Emea alternatives at Goldman Sachs Asset Management, said: “We think those types of assets, which would include things like logistics, life sciences and a lot of the residential areas, will perform well long term.”
However, sectors like “the lower end of the office market” that are suffering from the negative impact of technology, including the work-from-home trend, could struggle, he said.
“Those are the types of assets where you’re probably going to see revenues deflate rather than inflate and, with the cost of capital going up, you will see values coming down,” Garman added.
Axa Investment Managers deputy head of alternatives Deborah Shire noted that infrastructure is still likely to perform well and remain on top of investors’ wish lists. “The current issue we have in Europe in terms of energy will definitely create a long-term tailwind for the asset class,” she said.
Niche areas of private markets
Private equity and private debt attracted almost a third of all expressions of interest in alternatives last year, according to MandateWire data.
UK investors were responsible for more than half (52 per cent) of all expressions of interest in private markets, followed by Italian investors (20 per cent) and Swedish investors (11 per cent).
The £10bn British Coal Staff Superannuation Scheme was one UK investor that revealed plans to invest in private markets. The scheme said it was keen to invest £187mn in private equity and £362mn in special situations debt.
The £17.8bn West Yorkshire Pension Fund also agreed to introduce a new 2 per cent exposure to private credit, which would be diversified across credit type, geography, manager and vintage year, according to the scheme’s annual report.
However, some institutional investors were cautious about the future of private markets following the downturn in public markets. Speaking during the FT conference, Thijs Knaap, chief economist at APG Asset Management – one of the world’s largest pension investors managing around €558bn – said revaluation of private assets was “overdue”.
“In the history of finance, I don’t think it has ever happened that liquid markets have gone down and private assets have not followed in some way,” he said.
However,DE Shaw group head of private credit Marianna Fassinotti argued that certain areas of the private markets are more insulated from the pressures of inflation and a tightening monetary environment than others.
She said some companies have decided to remain private for longer, either by choice or because the initial public offering market is challenged. “Those are areas we are very excited about today, because we are able to invest at attractive valuations relative to what we have seen historically,” she added.
Consultants advise asset owners to protect against tail risk
Amid high inflation, market volatility and mounting fears of recession, investment consultants are advising asset owners to consider implementing some form of tail-risk protection, while urging them to first focus on building well-diversified investment portfolios that could protect against downside risks.
Synthetic risk transfers and investments in litigation finance strategies are other, more niche areas of interest for the manager.
“What we’re looking for today is that price discovery. So, we’re going out across a set of different asset classes and strategies and testing the markets with valuations, looking to place bids in areas where we think valuations should have moved and seeing how the market responds to us in those situations,” she said.
*Expressions of interest comprise manager searches, planned investments in a new asset class, and planned investments in existing asset classes recorded by MandateWire.
This article originally appeared on MandateWire.com
