2024 Private Assets Report

1) The 60/40 portfolio may be back, but will it deliver in 2024?

Last year the 60/40 portfolio delivered its best returns since 2019. Despite the win, correlations between the S&P 500® and the Bloomberg US Aggregate Bond Index reached a 40-year high, giving professional investors reason to rethink strategy and more reasons to look to private markets for diversification in 2024.

Overall, 65% of institutional investors say a 60/20/20 allocation diversified with alternative investments is more likely to outperform in 2024.¹ Many are focusing on private investments for those alternative allocations.

Private investments have taken a prominent role in institutional strategy over the past decade and now account for 83% of all alternative allocations in institutional portfolios, including private equity (29%), private credit (17%), infrastructure (14%), and real estate (23%). Many indicate minimal allocation adjustments over the long term.¹

Among those who invest: 83% will maintain (44%) or increase (39%) allocations to private equity; 88% will maintain (43%) or increase (45%) allocations to private debt; 90% will maintain (50%) or increase (40%) allocations to infrastructure; and 79% will maintain (50%) or increase (29%) their real estate allocations.¹

Private assets continue to make up the bulk of institutional alternatives allocations¹

2) Despite overcrowding concerns, the smart money remains bullish on private assets.

With more than $11 trillion invested in private assets, there are reasonable concerns about overcrowding. Overall, 59% of institutional investors go so far as to say the increased popularity of private equity is making it difficult to find opportunities.¹

Despite challenges in finding deals, and sub-par distribution performance of 11.25% of net asset value on average in the last year,² institutional teams will not reverse course on the centerpiece of their alternatives strategy in 2024.

Overall, 60% remain bullish on private equity. One key reason for their optimism is the potential to outperform public markets, as nearly two-thirds (66%) of institutions believe there is a still a significant delta in returns between private and public markets.¹

While private investment helped enhance returns over the past 15 years, the macro picture is changing: Low rates are in the rearview mirror and there is concern about economic growth. But rather than moving out of the asset class, institutions are emphasizing the deal quality and 72% say they have stepped up their due diligence in their analysis of opportunities.¹

“Whether for institutional investors or to address the growing demand from private individuals, building diversified private equity portfolio within the small & mid market is key to delivering sustained risk-adjusted superior performance,” says Eric Deram, Managing Partner, Flexstone.

Institutions are bullish on private equity, but they may be looking at it in a new light. After going all-in on the asset class for the better part of a decade, many are reaching their limits for private investment. As a result they will look to sell off some of their holdings, creating opportunity in the secondary market.

This is likely why they rank secondaries (32%) right behind sustainable investing (35%) as the best source of private investment opportunity in 2024.¹

Where the best opportunities for private investment lie¹

3) Private credit opportunity expands as traditional lending tightens.

In the wake of the biggest interest rate hikes in decades, traditional lenders find themselves operating in an unfamiliar environment and private lenders are poised to seize the opportunity.

Facing higher liquidity constraints, higher capital costs, and increased regulatory scrutiny, banks are pulling the reins on commercial and industrial lending. As reported in the Fed’s January 2024 Senior Loan Officer Opinion Survey, banks are tightening premiums on riskier loans, spreads of loans over the cost of funds, costs of credit lines, and collateral requirements.³

Private lenders are stepping in to fill the void. Institutions are taking note and two-thirds (66%) anticipate more private debt will be issued in 2024 to meet growing borrower demand.¹ This is likely to be a long-term trend as private debt AUM is projected to grow to $2.8 trillion by 2028, nearly double the total from 2022.⁴

“This sentiment mirrors our own experience as a direct lender. Private debt remains resilient and attractive for investors, who continue to see good returns on their investments,” says Nicole Downer, Managing Partner, MV Credit. “On the flip side, borrowers and Private Equity firms welcome the growth of the asset class which provides them with a reliable source of financing capital.”

Commercial real estate in particular, is creating opportunities. “Commercial property values generally speaking are anticipated to hit a bottom this year and, at the same time, $900 billion in loans will come due on commercial properties according to Mortgage Bankers Association figures,” says Sara Cassidy, Managing Director at AEW. “Owners need refinancing options – that will likely come with a greater amount of required equity – and with traditional lending sources on the sidelines or less active, this creates a significant opportunity for private lenders to fill the gap by entering the capital stack at a valuation that may be below replacement cost on high quality assets in good markets.”

Institutions are also anticipating that a boom in private lending will add up to investment opportunity in 2024 and 64% are bullish on the asset class. Competition for new deals may be fierce, as 45% say they will increase private debt allocations this year – more than any other alternative investment.¹

When it comes down to how they will invest, it’s likely they will stick with the familiar. Right now, their investments focus on funds of funds (41%), direct lending (40%) and co-investment (39%).¹

How institutions are invested in private debt¹

6) The democratization of private assets continues to gain steam.

Institutional investment has been a boon to private investment over the past decade, and individual investors have taken note. Advisors and wealth managers have responded in kind.

Globally, 34% of individual investors are interested in private investment opportunities, ranking them just behind financial planning, retirement income planning and sustainable investments as the service they most want from their advisor.8 More than half of fund selectors (51%) at leading wealth managers say their firms are responding by offering more private asset strategies to meet higher demand.⁷

But the rationale for private investment extends beyond demand as 61% of selectors say retail-friendly private asset vehicles are helping them enhance client diversification. In looking at client investment objectives, 64% also say that the long-term nature of retirement saving makes investing in private assets a sound strategy.⁷

Selectors are split on their ability to deliver private assets at mass scale, as just 51% believe that increased deal flow is allowing them to offer private investment more broadly to clients. This is a likely reason that funds of funds (42%) top their lists of private asset offerings followed by infrastructure (40%), growth capital (39%), venture capital (38%) and direct co-investment (37%).⁷

Top services clients want from their financial advisor⁸