Private markets study: European institutional investors bullish on infrastructure, less so for real estate

With capital raisers out talking with institutional investors to gauge their appetite for real estate, a new study has emerged that will have a bearing. 

State Street, which owns one of the largest asset custodian businesses in the world, has published findings of its annual report into private markets allocations from 480 institutional investors including traditional asset managers, private market managers, insurance companies and asset owners, across North America, Latin America, Europe and Asia-Pacific.

The good news is that similar to the global trend (68%), the survey finds that 69% of the respondents in Europe plan to continue their allocation to private markets in line with current targets, despite acknowledging that interest rate rises reduce the attractiveness of the highly leveraged asset class.

Within private markets, private equity (PE) remains the most attractive asset class, with 57% of institutional investors in Europe anticipating making it their largest allocation over the next two to three years, which is lower than global investors (63%).

Meanwhile, infrastructure is more of a focus for European institutional investors (56%), compared with investors in the US (38%), APAC (44%) and Latin America (43%). This means European institutional investors see more opportunities in infrastructure than their counterparts in other regions.

Real estate
When it comes to real estate, the survey finding shows that European respondents were the most bearish on property, most likely leading to a reduction of their allocations to the asset class.

The company explained that given the variety of different variables in real estate, from ever-increasing construction costs, inflation, recent macroeconomics and geopolitical events - European respondents are looking to invest in other areas such as infrastructure whether it be green energy and other forms of transportation, for example greater integration of trainlines between neighbouring countries.

Real estate was the asset class most European respondents felt would increase as a retail asset class, though. However, they were more bearish on this prospect than the other regions' respondents.

Historically, the only type of private asset class retail investors would be exposed to would be real estate, whether it be the home they own and live in, or their rental property. They are most familiar with this type of asset class compared to venture capital, and infrastructure, so it would stand to reason for institutional investors to find it as the most appropriate one for retail investors.

Taking investors as a global set, private credit is asset class investors are least likely to make their largest allocations to, (43%), with real estate and infrastructure both at 48%. Respondents made it clear they were going to be more focused on deal quality in future with many making changes to their due diligence processes (47%) or narrowing the universe of investments they will consider through higher baseline standards (42%).

‘The tailwinds of the last decade may be gone, but it is clear that private markets remain attractive,’ said Paul Fleming, global head of alternatives segment at State Street. ‘Our survey finds that three quarters of respondents think tougher economic conditions will create discounted opportunities, but investors are likely to bide their time, as at least half feel valuations have not yet fully adjusted. Dry powder will become invaluable in the next couple of years.’





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