Despite the impressive rise of private alternatives, two-thirds of European and Asian professional fund buyers believe their clients remain underexposed to this asset class, according to a study.
PGIM, the global asset management arm of Prudential Financial, surveyed 210 gatekeepers from the UK, Europe and Asia, revealing significant underinvestment in private market strategies.
In Europe, 64% of gatekeepers reported underinvestment in private markets, while the figure is 76% in Asia. Gatekeepers globally seek more favourable fee structures, greater transparency, and improved accessibility to unlock greater allocations to private market assets.
Private markets pros predict better deal making conditions
Matt Shafer, head of international distribution at PGIM Investments, expects a surge in demand for private markets similar to the rise of emerging markets investing. “It took time for investors to embrace emerging markets investing, but it’s now essential for diversification. Private markets will be viewed similarly in the coming years.”
Gatekeepers are also optimistic about fixed income returns. In public fixed income, 59% expect increased returns, and 50% anticipate gains in private fixed income. Consequently, 52% plan to increase public fixed income allocations, targeting investment grade corporates (54%) and government bonds (47%). There is also strong interest in high yield (39%) and emerging market debt (38%).
Shafer noted that while cash rates remain high, the certainty of returns diminishes over time. “Fixed income may offer more confidence for targeted returns. Long term, cash could be riskier, especially as central banks start cutting rates.”
Equity returns present a less clear picture, with only 10% of gatekeepers anticipating increased returns for public and private equity. Many expect heightened volatility and geopolitical risks, especially with upcoming elections in the UK, France and the US. Despite this, global equities and thematic equities are top targets for increased allocations, with small- and mid-cap equities expected to rebound over the next 12 months.
Funds Europe Awards 2024: who will champion private markets this year?
Shafer added: “Rate cuts would benefit equity markets, but fundamentals drive long-term performance. Companies must show durable earnings growth and strong demand. Growth stocks are expected to outperform value-oriented peers.”
AI’s rise is a significant theme, with nearly half of gatekeepers prioritising it. According to the researchers, this drives increased interest in data centres, with 47% willing to boost allocations in this sector due to its growth opportunity.
