Not-for-profits look to private markets as they seek better investment returns, according to new Mercer survey
Not-for-Profit investors see private markets as the biggest opportunity for higher returns in the coming years, according to Mercer’s first Global Not-for-Profit (NFP) Investment Survey. However, the survey also found that diversifying their portfolios away from traditional asset classes comes with challenges including increased complexity, higher fees, and more resources required for effective investment manager selection.
The survey canvassed the views of 133 Not-for-Profit investors across 20 countries in four areas: market trends and asset allocation; investment in alternative asset classes; sustainability and ESG; and business strategy and outsourced investment management. It shows that, while most (79%) Not-for-Profits are satisfied with how their portfolios performed over the past three and five year periods, a majority (59%) say their biggest concern is that investment returns will be low over the next three year period. Moreover, 39% say they are uncertain that their portfolios are positioned for an extreme downturn. The survey was conducted prior to the second quarter of 2022, which tested portfolio resiliency.
While investors enjoyed one of the strongest periods of growth in equities and bonds during the past decade, the prospect of lower returns in the future is leading many Not-for-Profits (65%) to believe that their biggest opportunity lies in diversifying their asset classes.
One way Not-for-Profits are diversifying their portfolios is by bolstering their allocations to private markets. Private markets comprise alternative assets that do not fall under the traditional equity or fixed income umbrellas, and are becoming increasingly attractive because they may offer a different return profile to an institutional portfolio. When asked if their organization invests in private markets, 63% of survey respondents said they are either investing in private markets, or plan to invest in private markets in the next 12 months, with 75% saying that they were looking to private markets to find better yields and enhanced investment returns.
However, there are clear challenges to investing in private markets for many Not-for-Profits, especially for those that have smaller portfolios and fewer resources. The survey found that organisations with portfolios of £1 billion or more are more likely to be invested in private markets (86%) compared with those with less than £250 million (40%). For those that are not investing in private markets, 55% say they lack the resources to assess investment opportunities, 46% say the investment vehicles and instruments are too complex, 43% say the fees are too high, and 41% say the manager selection process is too complex given the wide dispersion of returns across the market.
Commenting on the results of the survey, Paul Fleming, Head of UK Endowments and Foundations for Mercer, said, “Not-for-Profits have come a long way towards embracing and investing in private markets, accelerated in recent years by turbulent uncertain markets, not-for-profit investors are being forced to look beyond traditional asset classes for risk adjusted returns. Encouragingly, there is evidence that most Not-for-Profits are overcoming barriers around access and resourcing by seeking help from third-party service providers. The survey found that 55% of organizations are using Outsourced Chief Investment Officers (OCIO) to navigate the complexity of private markets.”
The survey also found that many Not-for-Profit investors are embracing ESG, yet, some investors still express apprehension around the impact on potential returns. 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. This suggests that there is still work to be done around education on the risk-adjusted performance of ESG-integrated strategies to help mitigate this apprehension.
When asked what is most important when selecting a third-party provider or OCIO, the majority (61%) said a strong track record of performance, while 45% said it was access to highly skilled managers, and 39% said it was a well-defined investment process and competitive advantage.
Rich Nuzum, Mercer Global President of Investments and Retirement, added, “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. 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."
About Mercer’s Global Not-for-Profit Investment Survey
Mercer’s inaugural Global Not-for-Profit (NFP) Survey was conducted in the first quarter of 2022 and gathered responses from 133 Not-for-Profit organizations in 20 countries. The survey assessed four areas: market trends and asset allocation; investment in alternative asset classes; sustainability and ESG; and business strategy and outsourced investment management. To learn more about Mercer’s Global Not-for-Profit Investment Survey click here.