Cerulli: Institutional Investors Shifting to Illiquid Private Markets

Investors are reallocating their risk budgets to illiquid private market investments, according to a report from Cerulli. The findings were a part of Cerulli’s September U.S. Products Trends report.

“In conversations with institutions, Cerulli has found that many are reallocating their risk budgets away from traditional active strategies in favor of illiquid private market investments,” the report states.

Institutional investors are also seeking more customization in investment products as they refine their investment strategies around principles such as environmental, social and governance standards, while also seeking to lower costs that come with private market investments.

Approximately 19% of surveyed funds said they planned to increase their allocations to private comingled funds, another 18% said they planned to increase their allocations to co-investments over the next 24 months.

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Cerulli reported Investors are seeking out exchange traded funds due to their lower cost, with 38% of institutional investors seeking to increase their allocations to ETFs over the next 24 months. Separate accounts, which offer investors greater customization, are increasing in allocations across investors, despite their search for lower costs, since these vehicles typically are associated with higher costs.

“As private market exposures are more costly in aggregate, institutions with finite risk budgets must reallocate funds elsewhere to make up for the cost differential. An example of this would be reallocating funds from mutual funds to ETFs, two vehicles that are extremely similar in terms of underlying investment characteristics but vary in costs, with mutual funds generally costing more than ETFs,” the report states.

Institutional investors expect to withdraw assets from mutual funds more than any other investment vehicle. According to Cerulli, 23% of investors plan to withdraw assets from mutual funds over the next 24 months.

Cerulli notes that institutions will have to weigh the importance of cost effectiveness and customization, which can be influenced by the type of fund and resources available. For example, Cerulli notes in the report that only larger funds have the internal resources to make co-investments, which have lower expenses due to having more control over investments.

“As institutions seek to reallocate risk budgets toward private market investments, their strategies around vehicle selection are paramount to securing adequate funds. While lower-cost traditional market vehicles allow institutions to achieve this objective, the pursuit of customization often can counteract the pursuit of lower-cost funds, blurring the otherwise clearer tradeoffs between vehicles,” the report states.

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Tags: Alternatives, Asset Allocation, Cerulli Associates

The China Investment Corp., which has nearly half of its foreign holdings in alternative assets, aims to capitalize on the ‘global green transformation.’

Chinese sovereign wealth fund China Investment Corp. reported a 10-year annualized return of 6.57% as of the end of 2023, exceeding its target by 31 basis points and raising its total asset value to $1.33 trillion. The CIC also announced it is looking to boost returns from abroad through sustainable investing.

The CIC, which invests on a 10-year time horizon, reported that, as of the end of 2023, the state-owned financial capital entrusted to Central Huijin was 6.41 trillion yuan ($914.2 billion), an increase of 9.4% from the beginning of the year. Central Huijin Investment Ltd. is a Chinese sovereign fund company under the CIC and is owned by the State Council of China.

As of the end of 2023, the asset allocation of the CIC’s foreign investment portfolio was 48.31% to alternative assets, 31.13% to public market stocks, 16.46% to fixed income and 2.10% in cash and other investments. According to a CIC statement, it “actively innovates overseas investment methods, continues to build a global investment partnership network, and supports cross-border investment cooperation.”

The sovereign wealth fund added that it is actively looking to invest in opportunities provided by the “global green transformation” and that its sustainable investment model “formulates an operational carbon neutrality action plan and orderly advances the carbon neutrality process at the operational level.”

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According to the U.S. State Department, the CIC is officially China’s only sovereign wealth fund, launched in 2007 to help diversify the country’s foreign exchange reserves. According to the report, timely information and updates on the CIC and other funds are difficult to obtain. However, according to the State Department, the CIC’s annual report published in December 2023 showed that the fund’s overseas investments earned a net return of 12.67% in 2022, lower in U.S. dollar terms than the 14.27% returned in 2021. The State Department also identified the annualized cumulative 10-year net return as 6.43%, lower than the 8.73% 10-year return through 2022, and its annualized cumulative net return since inception as 5.94%.

“CIC’s overseas investments encompass all major asset classes in international markets and span over 110 countries and regions worldwide,” according to the State Department report, which added that the distribution of the CIC’s global public equity investments was 59% in the U.S., 27% in non-U.S. developed markets and 14% in emerging markets and others.

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