Not-for-profit institutions want a piece of the private markets action

Mercer study finds that the sector is ken to diversify from traditional asset classes

Not-for-profit institutions want a piece of the private markets action
Steve Randall

The growing interest in private markets among investors has not been ignored by the not-for-profit sector.

This sizeable group of institutional investors are keen to diversify portfolios for better returns and see private market opportunities as key to achieving their goals.

A survey of 133 not-for-profit investors by Mercer spanned 20 countries and asked for views on market trends and asset allocation; investment in alternative asset classes; sustainability and ESG; and business strategy and outsourced investment management.

If found that around 8 in 10 respondents were satisfied with how their portfolios had performed in the past 3- and 5-year periods, but 6 in 10 are concerned that returns will be low in the next 3 years.

Almost 4 in 10 were unsure if their portfolios will stand up to an extreme downturn (the survey was conducted before the second quarter of 2022 which has tested portfolio resilience).

Two thirds of not-for-profit investors believe that diversifying portfolios will provide the greatest opportunity if returns shift after a strong decade for equities and bonds.

Private markets could be a core part of the strategy with 63% of respondents expressing interest in investing in these assets in the next 12 months.

While 72% of respondents say they intend to increase their exposure to ESG-related investments in the next two years, 39% believe that they may have to make compromises in doing so and, of that group, 57% believe it means compromising on absolute returns. 

Size matters

However, with smaller portfolios and resources, it may only be the larger not-for-profits that make significant allocations to private markets.

The survey found that organizations with portfolios of US $1 billion or more are more likely to be invested in private markets (86%) compared with those with less than US $250 million (40%). 

Lacking the resources to invest in private markets (55%), complexity of investment vehicles and instruments (46%), and higher fees (43%) are cited as reasons for not investing in private markets.

Respondents also said that the asset manager selection process is too complex, although 55% are using outsourced chief investment officers to help them navigate private markets.   

“The survey is consistent with what we hear from our clients every day – complexity can make it challenging for Not-for-Profits to implement private markets efficiently,” said Rich Nuzum, Mercer global president of investments and retirement. “High fees, illiquidity, and ESG integration objectives all compound the challenge. As clients navigate this uncertainty, they are seeking out advisors with a customized service approach and global research capabilities at scale to deliver the breadth and depth of coverage they need."