Evolving expectations, a shifting interest rate environment and the need to manage increasingly large asset bases for performance and for national and societal impact are transforming how and where institutional investors allocate capital, according to a new report by the Boston Consulting Group.
It found in 2024, sovereign wealth funds and public pension funds accounted for an estimated US$36 trillion in total assets under management, with a compound annual growth rate of six per cent anticipated through 2030.
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Institutional investors’ allocations to private markets have increased by an average of 10 per cent per year over the past decade, driven by portfolio diversification considerations and the potential for higher returns. The report estimated that institutional investors now control up to 70 per cent of all private AUM globally.
Many pension investors are re-evaluating their private assets strategies to meet evolving liquidity and return considerations, said the report, noting most are located in developed countries and must meet specific distribution liabilities, which can be substantial, especially for plan sponsors that serve beneficiaries with challenging demographics.
Mature plans already see growing net negative contributions and as cash flow becomes a priority, the bar for making new capital commitments will rise, increasing pressure on these investors to shift away from private equity and toward more liquid, less risky or higher cash-yielding asset classes.
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While private equity has historically outperformed other asset classes across private markets — yielding a 15 per cent annual return since 2014 — the report noted infrastructure has outperformed private equity over the past year, owing to its effectiveness as a natural hedge against inflation and its greater weighting in digital infrastructure and green energy projects. Institutional investors’ allocation to infrastructure increased by a compound annual growth rate of 14 per cent from 2014 through 2023 — the second-highest growth rate across asset classes.
Private credit is also maturing as an asset class, due to higher interest rates and improved risk-return profiles for non-bank institutional lenders.
“Principal investors are becoming increasingly active in shaping private markets,” said Benjamin Sheridan, a managing director and senior partner at BCG and the report’s co-author, in a press release. “Their evolving priorities are not just transforming asset allocation but also redefining the broader capital ecosystem.”
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