The prevalence of private assets, such as private equity and real estate, within institutional portfolios has risen to the point of impacting total portfolio returns as much as that of public investments, said a new paper released by BlackRock.
These allocations have reached a tipping point in their impact on overall returns. For example, allocations among global pension funds have reached 25% of the portfolio by 2015.
“There's a growing need for clients to continue exploring private assets in a world where traditional asset classes are underperforming,” said Edwin N. Conway, managing director and head of BlackRock's institutional group in the U.S. and Canada, in a phone interview.
Allocations to private assets are likely to keep growing. About half of institutional investors intend to increase allocations to real assets and half of fixed-income investors intended to increase exposure to private credit, the paper said.
Once dominated by private equity buyouts and venture capital, BlackRock's paper asserts that private asset strategies are now numerous, diverse and able to contribute to specific investment outcomes, be it growth, income, real return or a combination.
Current pricing for large, auctioned private assets is stretched. Within keystone private asset classes — private equity, credit and real assets — BlackRock often favors opportunities in smaller markets and niche areas, where competition is lower and specialized underwriting expertise is a prerequisite.
Managing risk and monitoring potential over-concentrations are key concerns in building private asset portfolios, the paper said. Investors can take proactive steps to gain better diversification or to hedge, but there's no denying that it's a resource-intensive endeavor, it added.
“If done correctly with the right managers, the outcomes can offset some of the disappointment in traditional asset classes,” Mr. Conway added.
Mr. Conway noted, however, that investors need to be aware of the risks associated with these assets.