A combination of forces have propelled the sector for areas such as private equity, venture capital and private real estate in recent years.

The demand for private markets investments by asset owners and managers is expected to rise in the next three to five years as investors seek higher yields and greater diversification, according to a recent survey that State Street conducted with 170 private market asset managers and asset owners.

Asset managers expect that their median allocation to private market assets will rise from 30 per cent to 35 per cent, while asset owners believe it will increase from 22 per cent to 28 per cent. Respondents identified the most significant drivers of this momentum to be diversification from listed markets (59 per cent of asset managers and 67 per cent of asset owners) and better opportunities for return generation (52 per cent of asset managers and 52 per cent of asset owners). 

Some 40 per cent of asset managers also identify private markets as an attractive and/or stable source of yield, the report said.

A decade of ultra-low interest rates has hit yields on conventional listed equities and government bonds, encouraging a flow of money into more illiquid – but higher-yielding – areas such as private equity and debt, forms of hedge funds, infrastructure and real estate. On the supply side, with firms typically taking longer to go to IPO than a few decades ago, and more businesses choosing to stay private, supply of private market investing is also up. Holders of “patient capital” such as family offices are also regarded as highly suitable backers of this space. This publication has also reported on how the rise of alternative investments has boosted demand for wider access and platforms such as those provided by iCapital Network, CAIS, and Moonfare, among others.

Barriers
However, the State Street report said that barriers to entry remain an issue in the alternatives space. Some 64 per cent of respondents are concerned about weak standards of accounting and audit controls, 60 per cent about high management fees relative to public markets and 58 per cent about the lack of uniform data standards. 

Another headache is data quality and standardisation – these are barriers to increasing private markets allocations, the survey found. Some 68 per cent of asset owners noted a significant opportunity cost to working with private markets data and want a higher quality data provisioning service. And 58 per cent also say that data management and data quality validation is now part of the due diligence process for manager selection.