- The continued growth in private-asset allocations (now accounting for more than 25% of pension-fund portfolios) has brought more scrutiny to the role and performance of the asset class.
- Investors striving to honor their commitments to net-zero emissions may first need to fully understand their private-asset portfolios’ current carbon profiles.
- Transparency and standardization of data are key to help investors construct portfolios and direct capital toward ventures that help address climate change and other long-term challenges exacerbated by COVID-19.
Private-asset investors are rapidly waking up to the urgency of the climate crisis, weighing the potential impact on their portfolios and planning how to decarbonize them. All this while dealing with disruptive trends like e-commerce and remote office work, which have accelerated during the COVID-19 pandemic.1 Over the coming months and years, we may see a substantial reallocation of capital, as investors reshape their real estate, private-equity, infrastructure and other private-asset portfolios in response to these challenges. In this “2022 Private-Asset Trends to Watch,” we highlight the ways in which the opaque nature of private assets may exacerbate these challenges for investors.
1) Private assets’ coming of age
Institutional allocations to private assets have been growing steadily for decades and now represent more than 25% of pension-fund portfolios in seven leading markets.2 Record levels of cash waiting to be invested3 suggest that managers face the challenge of deploying capital swiftly. Such success in raising capital brings other challenges. With significant allocations, investors naturally ask more detailed questions about their exposures and how they aggregate across their broader portfolios. Right now, these can appear as unmatched pieces in a jigsaw puzzle. To satisfy investors’ rising demand for transparency, managers could begin to compete not only on performance, but on their ability and willingness to share data and insights into portfolio exposures — and do so using a standardized approach that helps investors piece this information together with that from other managers across their private-asset allocations.
2) From talk to action: Making good on net-zero commitments
2021 was the year of the United Nations’ COP26 climate meeting and companies’ net-zero commitments. Investors and managers who made such commitments now need to honor them by transitioning their portfolios toward net-zero emissions. This transition requires detailed knowledge of each of their investments’ current emissions, as well as a view of how they will change over time. For public assets, this requires a standardized assessment of the issuing company’s own targets and plans with respect to comprehensiveness, ambition and feasibility.4 For private assets, simply assessing current actual emissions is often a challenge, even though investors and asset managers may have more direct control or stronger influence on carbon-reduction initiatives. Although the specific challenges will vary significantly between the sub-asset classes (real estate, venture capital, infrastructure, etc.), huge strides will need to be made in terms of climate-data disclosure to facilitate the flow of capital to where it’s needed to transition portfolios to net-zero.
3) Private assets’ big ‘small data’ problem
Private-asset investors are beginning to make innovative use of big data and artificial intelligence to help identify assets with attractive characteristics and manage them more efficiently. A gap still remains, however, in linking these newly identified characteristics to their impact on investment performance. Even though private assets are traditionally characterized as opaque compared with their publicly listed counterparts, the problem often isn’t a lack of data — but the fact that this “small data” is fragmented, siloed and not disclosed in a standardized way, which makes it difficult to aggregate and tease insights from. We expect to see increased interest in harnessing big data and AI techniques like machine learning to close this gap, help strengthen investment processes and enable innovative, data-driven portfolio construction.
4) Pricing changes in rapidly shifting markets
The onset of the COVID-19 pandemic illustrated how public-market pricing, private transactional pricing and private valuations can diverge in the short run. Major disruptions, whether caused by climate change, technological improvements or changing living and working conditions, could render certain types of businesses, property types and infrastructure assets stranded — or at least lead to significant pricing changes. Unlike in public markets, it takes time for sentiment to feed through to transaction pricing, and then on to the valuations, of private assets. Investors seeking to understand how such impacts can affect their portfolio values may employ a sophisticated triangulation of insights from private valuation, transactions and public-market data.
5) Cash (flow) is king
The COVID-19 pandemic put the cash flows of many businesses and real assets under severe stress. It also accelerated a number of established disruptive trends like e-commerce and remote work that are shifting some assets’ cash flows along the bond/equity spectrum. This shift presents an investor challenge, as private assets vary greatly in their cash flows. Some, like early-stage venture capital and development-oriented opportunistic real estate, have little to none at inception. Others, like core real estate and certain types of infrastructure, have long and secure income streams. Most are somewhere in the middle, with varying levels of security and sensitivity to economic growth and inflation. In short, some are more equity-like and others more bond-like. Investors may wish to model and monitor their cash-flow risk in more detail, as markets face the stress from long-term secular changes. More sophisticated modeling may help ensure that private-asset portfolios provide the required cash-flow risk profile and are suitably protected against such threats as inflation or tenant default.
1Cutter, Chip, and Putzier, Konrad. “That Big Office Building? It’s an E-Commerce Warehouse Now.” Wall Street Journal, Dec. 10, 2021.
2“Global Pensions Asset Study — 2021.” Willis Towers Watson Thinking Ahead Institute, Feb. 16, 2021.
3“Burgiss Manager Universe Updated through Q2 2021.” Burgiss, Sept. 18, 2021.
4Watanabe, Kenji, and Panagiotopoulos, Antonios. “Breaking Down Corporate Net-Zero Climate Targets.” MSCI Research Insight, May 24, 2021.