Allocations to alternative investments to increase, ESG a factor: Eaton Partners

A survey of institutional investors by Eaton Partners found that almost two-thirds intend to increase their allocations to alternative asset classes and private capital markets, with 9% of respondents targeting non-correlated assets specifically, while ESG is also seen as an important factor for future investment flows.

“As the world navigates new challenges related to the ongoing pandemic, inflationary pressures, supply chain disruption, and market volatility, LPs remain confident in the ability of private capital markets to weather these storms,” explained Jeff Eaton, Global Co-Head and Managing Director at Eaton Partners.

The survey found that institutional investors continue to have a constructive outlook on private capital markets and alternative investments, set against a backdrop of rising inflation, potentially higher interest rates, and with increased scrutiny on environmental, social, and governance (ESG) issues also a factor.

The new “Eaton Partners LP Pulse Survey” questioned leading limited partners (LPs) from 46 top institutional investors around the world during September 2021, gathering their views on alternative investments.

“The current investor sentiment indicates strong confidence in the private capital markets as the macroeconomic future remains in flux with day-to-day adjustments to the hybrid post-pandemic workplace,” Peter Martenson, Managing Director at Eaton Partners said.

The outlook for fundraising is seen as positive, with 20% saying they expect a significant uptick in fundraises before the end of this year, suggesting institutional investors will remain open to new opportunities.

Another 13% said they expect somewhat of an increase in fund closings, while 38% said they expect more fundraising, but some of this likely delayed into 2022.

While investors are largely expected to target areas of the market such as buyouts, venture, growth equity and private credit investments, 9% of respondents said they will be looking to increase allocations to non-correlated alternatives, which has a positive read across for insurance-linked securities (ILS) and reinsurance investing.

Performance remains key and track records of fund managers are deemed the most important factor in deciding on allocations, while investment teams, as well as strategy and the marketspace operated in, are also seen as important.

36% said fees and terms are most important to them, but interestingly, while ESG is seen as a factor and investors are keen to find more ESG appropriate investments, only 4% said ESG or SRI are key to them.

“Institutional investors are laser-focused on the financial performance of fund managers as they look to target and increase their allocations in the private markets. This back-to-basics approach is indicative of an industry adjusting to continued volatility and uncertainty among many external factors,” Jeff Eaton added.

On the ESG front, while it’s not yet a key allocation decider for the investors surveyed, it is set to become increasingly important and ESG specific opportunities are likely to benefit as a result.

“ESG factors are an increasing catalyst for investors, as roughly three-quarters (73%) say they’re either focused or will put increased focus on climate change, and nearly one-third (32%) believe being socially responsible investors likely improves investment returns compared to 16% who think such a focus would hurt returns,” Eaton Partners said.

Martenson added, “Fund managers that are willing to adapt to the rapidly shifting needs of limited partners, such as a focus on ESG factors, while providing exemplary service in an environment that is opaque, will be the ones that excel in tomorrow’s markets.”

One of the trends we’re hearing from many ILS fund managers is that investors are increasingly looking for quality fixed income alternatives and some institutions are pulling back from the traditional fixed income options where yields are increasingly seen as depressed.

That also presents an opportunity to ILS and reinsurance interests, as structuring fixed income equivalents with relatively uncorrelated returns could be a significant beneficiary of institutional flows in the coming years, it seems.

Also of interest from the survey, is the fact that 16% of institutional investors surveyed said that the COVID-19 pandemic has driven a permanent shift in how investments are made, saying that physical meetings may no longer even be deemed necessary in every case.

Another 76% said that the temporary shift in how investments are made that COVID-19 has caused will lead to more, but not exclusive, use of virtual tools in their investment allocation process and decision-making.

ESG investing and the opportunities it presents are a growing focus for the insurance-linked securities (ILS) market. Read more of our insights on this topic here.