U.S. institutional investors are increasingly looking to private asset opportunities to diversify their portfolios and invest sustainably, according to findings from Schroders’ Institutional Investor Study.
The annual study, which spans 200 North American institutional investors—including 117 in the United States representing over $7 trillion in U.S. assets—gauged institutional investor sentiment on the key trends and drivers impacting the investment landscape, and how they are managing their portfolios accordingly.
It found that nearly one-third (32%) of U.S. institutional investors plan to increase their private asset allocations over the next two years, primarily due to diversification benefits, lower volatility and the potential to garner higher returns than the public markets. Investors had the highest interest in increasing allocation to infrastructure investments, with 42% planning to do so over the next 12 months.
Investors ranked diversification alongside higher expected returns as the key reasons for using private assets; 65% of investors see higher return potential as the main reason for using private assets, followed closely by 64% who see diversification as the most valued quality of private market allocations.
Asked what they expect the most important benefit will be in two years’ time, diversification becomes the first choice (60%), followed by lower volatility (53%) and higher returns (53%). Hedging against inflation, income generation and delivering against specific sustainability and impact objectives also saw an uptick.
Sustainable Investing
Investors also see private assets as an opportunity to incorporate sustainable and impact investments into their strategy. When asked about some of the key investment themes to which investors want to allocate through private assets, 49% of participants listed the technological revolution, followed by 39% seeking to proactively allocate to private investments tied to the energy transition—a theme many believe will spur investment in innovation, creating significant investment opportunities.
“Amid continued volatility and geopolitical uncertainty, investors are looking for opportunities for diversification and returns that align with trends shaping global markets,” said Nick Thompson, Head of Private Asset Sales, North America. “Private assets investing can allow them access to companies and industries at the forefront of major developments, such as the energy transition and technological innovation. Asset classes like private equity and infrastructure investing can offer both high returns and sustainable opportunities.”
Thematic Investing
When asked for their preferred approach to investing sustainably, U.S. respondents highlighted thematic (69%, compared to 61% globally) as their top choice. According to Schroders, this data illustrates a shift from simply considering ESG as a risk mitigation tool, to identifying and targeting thematic sustainability opportunities arising from macroeconomic shifts.
Meanwhile, despite ongoing arguments about the role of ESG in portfolios, U.S. institutional investors continue to see value. In this case, 74% of U.S. investors said that a top three reason for investing in sustainability and impact strategies was the belief that doing so is required to achieve long-term financial returns. In addition, 66% stated that they are motivated by the appetite to diversify into new sectors.
Ongoing Concerns
U.S. institutional investors were split in their level of confidence on achieving their return expectations over the next two years: 54% were somewhat confident, while 45% were confident or very confident (4% said they are not confident at all).
Affecting their view are several factors they believe will impact their portfolios over the next year, including geopolitical uncertainty (54%), tapering of monetary policy (45%) and rising inflation (44%).
Conducted during May-June 2023, the survey respondents—770 globally, including 117 in the U.S.—represent a spectrum of institutions including corporate and public pension plans, insurance companies, official institutions, endowments and foundations, collectively responsible for $34.7 trillion in assets.
