For Energy Transition Investing, Allocators Eye Private Assets

Institutional investors are increasingly attracted to renewable energy and other kinds of sustainable endeavors—and feel private assets are a good way to invest in them, according to a survey by London-based asset manager Schroders PLC.

Over the next two years, two-thirds of allocator believe private assets—private equity, private credit and real estate—offer the best opportunities to get involved in energy transition. As a result, 35% of them plan to increase allocations to private assets over the next two years.

Why private assets? The survey, of 770 allocators worldwide holding a combined $34.7 trillion, found that a majority (65%) said this asset category “delivers a deeper source of diversification over the next two years.”

To be sure, this sentiment runs counter to a diminished appetite for private equity and real estate lately among some institutions, mainly due to a stalled mergers and acquisitions field and weaknesses in some parts of commercial property, notably offices. Plus, higher interest rates have spurred the allure of publicly traded bonds and money markets. This creates a liquidity problem: Private assets usually tie up investments for long periods, so the capital in them cannot be tapped for other opportunities or obligations.

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In terms of investing in private assets for renewables, however, the Schroder’s respondents displayed no such qualms. Among investment types, developed market equities was the top choice (31%) for investing in renewables and decarbonization over the next two to three years, while private equity tied with commodities for second place at 24%.

In fact, the push into private assets results will increase over the next two years, the survey reported. Right now, private equity plays a major role in delivering sustainability for 39% of respondents, with 50% saying it has a minor role and 11% no role.

In two years, PE’s status as performing a major role will expand to 48%, outranking the other two grades, the survey stated. The survey projected the same for private credit’s standing as occupying a major role, moving to 33% from 27%; and real estate, rising to 38% from 25%.

These results, of course, come during a time of concern about inflation and geopolitical turmoil, the study noted.

Despite the caution that these worries generate, Nils Rode, CIO of Schroders Capital (the company’s private markets investment division), commented in a statement that the survey shows “many investors continue to be drawn to private assets as a means to engage with the evolving macroeconomic landscape, as well as to add resilience to portfolios.”