Almost half of institutional investors’ private market allocations will be in sustainable or impact mandates within two years according to new research.
Legal & General looked at investor attitudes towards private market allocations from managers working across the DC, DB, LGPS, insurance and charity investment sectors, which run more than £7.6 trillion in assets.
They found that investors see a clear alignment between commercial returns and the societal and environmental outcomes they are prioritising. With impact and sustainable mandates rising in prominence, a strong majority of asset owners are currently prioritising environmental (77 per cent) and social (75 per cent) outcomes in their private markets portfolios — with this trend set to accelerate over the next two years.
Of the client segments surveyed, DC pensions schemes are expected to have the greatest number of impact and sustainable mandates, representing a total of 50 per cent of private portfolios in two years. This is closely followed by insurance investors at 47 per cent and DB pension schemes at 45 per cent.
Over three quarters (81 per cent) investors said that clean energy & tech and renewable energy infrastructure were the top environmental outcomes they’re prioritising, identifying these sectors as providing the biggest investment opportunities in the near future. This is followed by sustainable transport (46 per cent), and sustainable property / real estate (36 per cent).
Economic infrastructure (52 per cent), health and social care (43 per cent), and affordable housing (41 per cent) are the social outcomes that are highest on investors’ agendas within private markets. Additionally, over half (57 per cent) of DC investors said life sciences was a top priority among social issues, alongside healthcare outcomes (53 per cent). In contrast, economic infrastructure (49 per cent) and affordable housing (41 per cent) are the top social outcomes for DB schemes.
When surveyed on the most attractive thematic trends to target via private markets, almost three-fifths (59% per cent) of respondents said the climate transition and decarbonisation.
As a result, institutional investors are seeking to increase their allocations to the following sectors in order of priority: infrastructure, private equity/venture capital, private credit, and real estate. More than half (53 per cent)of those surveyed plan to increase allocations to infrastructure over the next two years, with 43 per cent set to also increase private equity and private credit.
DC schemes are prioritising transmission assets and network resilience to a greater extent than other investors, with 47 per cent citing this as a priority area. Whereas, LGPS are the most likely cohort to see nature-based solutions as offering the best return opportunities (20 per cent compared to DC at 17 per cent and insurers at 11 per cent).
L&G Asset Management global head of private markets Bill Hughes says: “As we set out earlier this year, our ambition is to expand our global Private Markets platform, giving clients access to a breadth of investment opportunities, particularly in private credit, real estate, infrastructure, and venture capital. This research confirms that investors are looking to increase their allocations to private markets for the potential increased returns they can deliver and also for their sustainability and impact characteristics.”
L&G Asset Management head of private markets distribution Christy Lindsay, adds: “This research allows us to gain a comprehensive overview of the opportunities and challenges institutional investors face in allocating within private markets. In our view, this can only grow in importance as a result of changing market and regulatory dynamics. As a long-standing investor in many of these critical sectors, we are well placed to help clients navigate future private markets allocations.”