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Investors turn to private markets in ‘lower for longer’ environment

More than 50% of new manager searches conducted by consultant bfinance focused on illiquid strategies, suggesting strong demand for uncorrelated returns.

Investors turn to private markets in ‘lower for longer’ environment

LONDON - Institutional investors continue to turn to opportunities in private markets, faced with a ‘lower for longer’ interest rate environment.

This is one of the findings of institutional investment consultant bfinance’s ‘Manager Intelligence and Market Trends’ report, which covers the 12 months to the end of September 2020.

The consultant recorded a 34% increase in the number of manager searches year-on-year for private markets mandates, accounting for 53% of all manager searches during the 12-month period.

The finding suggests that demand remains strong for illiquid strategies, not least the prospect of uncorrelated returns from mainstream asset classes.

Dynamics

Within private markets, the report noted increased interest in infrastructure and private equity mandates, and a reduction in the number of real estate and mainstream private debt searches over the period.

Nevertheless, there was a surge in more specialist private debt and debt-like strategies, such as trade finance, equipment listing and asset-backed credit – suggesting the hunt for yield is on.

This may also explain why bfinance recorded a resurgence in high-yield manager searches during the period. Meanwhile, investment grade credit and emerging market debt strategies proved less popular.

Demand for hedge funds also fell, accounting for only 8% of new manager searches, down from 16% the previous year.

Covid winners & losers

As the effects of the ongoing Covid-19 crisis continue to be felt, the report noted wider-than-usual performance dispersion across asset classes, as the pandemic’s winners and losers have begun to emerge.

‘Managers could not have foreseen the dynamics of Covid-sensitive and Covid-resistant sectors. However, this period is also rewarding disciplined teams that have diversified well, remained prudent in the deployment of capital during a period of high competition among buyers, maintained low levels of leverage on favourable terms, hedged effectively and maintained good levels of liquidity,’ the report said.

The investment consultant also monitors risk appetite amongst its clients via its risk appetite barometer. It found that institutional investors stayed in ‘fear’ mode during the third quarter – albeit less so than the second quarter. This helps to explain why risk asset exposures continued to rise.

Likewise, they felt more positive in their outlook but bfinance still classified them as being in the ‘bearish’ camp.

‘Does this indicate comfort with the economic outlook amid the pandemic’s progression, or a pragmatic ride on the “great asset price inflation” bandwagon?’ the report added.

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