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Public pension schemes and sovereign wealth funds plan to pour more money in to private markets over the coming year, despite warnings from financial watchdogs about the risks presented by the rapid growth of the sector.
Half of funds surveyed by the Official Monetary and Financial Institutions Forum (Omfif), a UK think-tank, said they expected to increase their exposure to private credit over the next 12 months, up from about a quarter last year.
Almost 60 per cent of funds said they planned to up their allocation to infrastructure, while more than 40 per cent expected to have a bigger position in private equity. Omfif surveyed 28 pension and sovereign wealth funds globally managing $6.5tn of assets.
The enthusiasm for private markets comes despite a flood of money that investors have already poured in to these assets in the years since the 2008 global financial crisis in search of higher returns and lower volatility, raising concerns about a potential bubble.
“Public funds are going to continue in aggregate to allocate more to private markets until something bad happens,” said Paul O’Brien, a trustee of the $11.2bn Wyoming Retirement System. “Nothing bad has happened yet.”
The California Public Employees’ Retirement System this year adjusted its strategic asset allocation to try and boost returns by increasing its target private equity exposure from 13 per cent of the fund to 17 per cent, while its private debt target increased from 5 per cent to 8 per cent.
Meanwhile, AustralianSuper’s annual report this year said “unlisted assets are expected to outperform listed equivalents over the medium to long term”.
The Omfif survey showed that private markets were three of the four most in-demand sectors for funds, as worries about inflation subside and big investors look to take more risk to try and achieve higher returns.
“They’re going back to being long-term investors and seeing opportunities over the long term in private markets and being less worried about liquidity and are willing to take on more risk,” said Nikhil Sanghani, managing director at Omfif.
However, central banks and regulators have raised concerns about the rapid growth in private markets, which have fewer disclosure requirements and are less liquid than their public sector peers.
In its financial stability report this year, the IMF said the potential contagion risks large financial institutions face from exposures to private credit were “poorly understood and highly opaque”.
Because the private credit sector had rapidly grown, it had never experienced a severe downturn at its current scale and efforts to mitigate risks had not yet been tested, the IMF said.
The Bank of England has warned that the widespread use of leverage within private equity firms and their portfolio companies makes them “particularly exposed” to tighter financing conditions.
Addressing the Council of Institutional Investors in September, JPMorgan chief executive Jamie Dimon warned big investors about the risks of continuing to increase allocations to private markets.
“Private markets have grown dramatically and they don’t have the same transparency and liquidity and research . . . is that what you want?” Dimon said.
“I’d love to be private if I could. I don’t know of a public company who wouldn’t say that . . . less litigation, less SEC, less frivolous shareholders meetings, more time to focus on long-term things,” he added. “We should step back and say what is it we really want in our capital markets . . . it’s too important to ignore”.
