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Aussie instos lean on innovation and quality amid volatility
Local investors are leading the region in plans to boost private market exposure, as demand grows for innovative fund structures, resilient investments, and a more selective approach to alternatives.
State Street’s latest private markets survey has shown that Australian institutional investors plan to increase allocations to 45 per cent over the next three to five years, up six percentage points from last year’s survey – marking the largest increase over any other APAC country.
The survey, which gathered responses from 450 investors globally, found that six in 10 Australian respondents currently have between 10 per cent to 30 per cent of their portfolio based in private assets. Over the next three to five years, this is expected to grow to seven in 10.
Expounding on how the results speak to a growing institutional readiness for alternative vehicles, State Street’s head of Australian product team, Cleyde Hazell, said Australian investors in particular are paving the way for supporting innovation in private markets.
“Australia has a mature investment landscape and openness to innovation,” Hazell told Super Review.
“Australians actually like to innovate and like to amplify, you know, whatever trend that they see is maybe starting here…or trends that they see overseas and bringing that in and expanding on that.”
It’s encouraging to see institutions across the country taking a leading role in expanding access to private markets, Hazell explained, with product innovation also playing a part in rising interest in semi-liquid, retail-style fund structures.
Namely, the survey also found that retail-style fund vehicles are expected to become the dominant channel for private markets investment globally in coming years, with 53 per cent of respondents projecting at least half of private market flows will soon come through semi-liquid retail products.
According to almost half (47 per cent) of Australian respondents, private debt will be the sub-segment to benefit from growth in semi-liquid funds the most.
“You cannot go to any meeting with clients where people are not talking about private debt or private credit in Australia,” Hazell highlighted. “In the last five years it's literally everywhere.”
“What is a key driver? More private credit funds are being structured and put out there in the market. It also offers diversification.”
“Usually when you invest in private markets assets, you know, PE funds or infrastructure, it's long term. It's 10 years, it can be two decades, some of these investments - you lock it in. But in private credit it's two to three years, so that can help with your strategy.”
Expounding on this in the report, the product lead said that investors believe private debt is easily securitised and therefore will benefit greater from the growth of semi liquid funds. In fact, developed APAC has been singled out as a key market for investing in private debt.
But geopolitical uncertainty - the likes of ongoing trade tensions - have also influenced this shift, with the less volatile return profile of these assets being cited as a key reason among APAC respondents for wanting to increase their allocations.
“Everyone is talking about the distressed market, what’s happening in macroeconomics…that issue of political uncertainty is actually reinforced in what the report says about the fight for quality assets,” Hazell told Super Review
Amid uncertainty, State Street emphasised that private market allocations are becoming a question of quality, not quantity. Previous data highlights that institutional investors are becoming increasingly selective when it comes to their private market investments, with an eye for due diligence and risk assessment.
“What are institutions doing? They’re becoming more selective, so instead of diversifying by numbers, they’re diversifying by quality. So really taking the time to source the right assets, in favouring developed markets and assets that hedge macro risk.”
“So private markets are still viewed as relatively stable compared to public markets in this macroeconomic environment that we have. Real assets like infrastructure and real estate are often resilient.
“And it's quite interesting because if you think of Australia, we love real assets, we love infrastructure. It starts in our homes, we want to own our own homes. When you think of an institutional investor, big pension funds, for the CEO it's much easier for them to explain when they have something that they can show. ‘See that bridge there, that's in our portfolio’,” Hazell concluded.
AUTHOR
Jessica Penny
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