Institutional investors remain bullish on alternatives

Private equity, real estate and infrastructure are the asset classes most likely to see increased allocations from LPs, according to a trio of recent studies.

A lack of liquidity is hampering limited partners’ ability to invest in alternative asset classes at present, yet private equity, real estate and infrastructure are the asset classes set to benefit from LPs’ plans to reduce their public equities exposure, several studies have found.

Roughly 30 percent of institutional investors plan to increase their private equity allocation over the next three years, while 30 percent plan to up their real estate exposure and 33 percent expect to increase their infrastructure allocations, a Boston Consulting Group survey found.

The UK’s National Association of Pension Funds queried nearly 300 respondents in October and received similar responses. The NAPF also found that investment in private equity by pension firms has risen by 1.7 percent to 2.5 percent in the last two years. “The pattern of UK pension fund investment has diversified as a means of better risk management. If volatile equity markets persist it would be likely that this trend will continue in 2009,” NAPF policy adviser on investment and governance, David McCourt, said in a statement.

Portfolio diversification is the primary objective for alternative investment growth, according to 83 percent of institutions and 76 percent of advisors surveyed by Morning Star in another report also published this week. “Our survey found that both institutions and advisors want alternative investments that are liquid, transparent and regulated,” said Steve Deutsch, director of accounts at Morningstar.

Of the 252 institutions that took part in Morningstar’s survey, 18 percent of financial institutions said private equity will be the alternative investment class most likely to get increased allocation over the next five years. Only hedge funds did better, with 25 percent predicting greatest increase.