LPs plan to increase deployments to ‘resilient’ private markets in 2024 – Adams Street

March 7, 2024 (Preqin News) – Most LPs believe that private markets will outperform public markets in the long term and plan to increase their allocations to alternative assets this year, according to the results of a new survey.

Almost 90% of 100 LPs surveyed by Adams Street Partners in the six weeks leading into 2024 believe that private markets will generate better returns than their public market equivalents over the long term, while two-thirds plan to increase allocations to the sector this year. Respondents included pension funds, institutions, and portfolio managers across the US, Europe, and APAC.

Rate-cutting expectations – and their potential as a catalyst for M&A – alongside an anticipated thaw in the IPO market and revised valuation expectations from founders are among the factors that Adams Street says contribute to views on private market allocations. Private markets’ perceived resilience to geopolitical and macroeconomic turbulence helped shape views, according to the report.

The survey also highlights that respondents expect private markets to play a ‘pivotal role’ in areas such as AI. Two-fifths of those surveyed anticipate the best investment opportunities in 2024 to be in technology and healthcare, sectors that Adams Street says it expects to benefit significantly from the application of the technology.

‘Confidence appears to come from a belief that private markets have the structural flexibility to navigate near-term challenges such as geopolitical uncertainty and more muted global growth, caused in part by interest rates and inflation remaining above target in many markets,’ the firm said in its fourth annual Global Investor Survey.

‘The resiliency of businesses to adapt to change and the transformative opportunity of technology megatrends such as AI have given investors confidence that private markets will continue to offer attractive investment opportunities in 2024 and beyond.’

Despite the anticipation of rate cuts this year, persistent elevated interest rates and inflation remain the most significant macroeconomic challenges facing private markets, according to the US firm’s survey. While 39% of investors identify those as the biggest investment challenge, it is a drop from the 55% who cited it in last year’s edition.

‘The era of ultra-low rates is over, private equity investors can no longer rely on ‘beta’ from macro tailwinds to lift all boats. Generating repeatable alpha requires skillful identification and selection of companies by the private equity investor,’ said Jeff Diehl, Managing Partner and Head of Investments at Adams Street Partners.

There is also noted interest in the secondary market for investors, with 88% of those surveyed indicating they will allocate up to 20% of their private market investments in the sub-asset class over the next five years.

Navigating geopolitical, macroeconomic, and environmental risks is a challenge for investors in 2024, with US political instability being a top geopolitical concern for over half of the investors, ahead of presidential elections scheduled for November.

The survey also found that 55% of respondents believe investing in managers with multiple growth strategies is the most important consideration for portfolio resilience. Investing in longer-term funds is no longer seen as the ‘sole shield against perceived risks’ in 2024, with responses dropping from 52% in last year’s survey to 49% this year.

‘Geographic diversification, meanwhile, ranked third among ways to protect against risk, at 47%, up from 36% a year ago. This reflects investors seeking exposure to regional champions and beneficiaries of shifting trade and supply chain patterns while reducing potential geopolitical risk,’ the report said.

Any increase in LP deployments to private markets, particularly by pension funds, would mark the continuation of a trend that has developed over recent years. Alternative allocations in the seven largest pension markets – representing 91% of total pension assets – have almost doubled over the last 20 years, from 11.7% in 2003 to 20.1% at the end of 2023, according to a report from the Thinking Ahead Institute.

_{The opinions and facts included within the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin providing the information in this content accepts no liability for any decisions taken in relation to the above.}