State Street Study Reveals Asset Owners’ Increasing Appetite for Illiquid Assets is Driving Interest in Co-Investment

State Street Corporation announced the findings from its latest study, A New Climate for Growth: Adapting Models to Thrive [1], which reveals asset owners are gaining scale through consolidation and co-investment; and outsourcing certain key functions, while bringing others in-house.

Over the past five years, nearly a third of asset owners surveyed (30 percent) have brought some asset management activities in-house; and 23 percent plan to do so over the next 12 months. Two thirds of asset owners (66 percent) also believe institutional investors with multiple funds will increasingly consolidate them over the next five years.

However, when bringing more functions in-house asset owners have faced multiple challenges; 53 percent of surveyed respondents stated operational resources are being drained as a result of managing the insourcing process; and 57 percent have struggled to get the necessary skills and talent in place to do so.

More than half (54 percent) of the asset owners surveyed see co-investment – where two or more institutions partner with one another on an investment – as a way to gain new expertise.

Over the next 12 months, 68 percent, 65 percent and 48 percent of asset owners plan to co-invest in infrastructure, real estate and private equity respectively. The study also reveals that over the next 12 months asset owners are planning to increase their exposure to these illiquid assets.

Another consequence of this trend toward gaining scale is the reassessment of priorities – with asset owners doubling down on certain operations and outsourcing others. More than a third (36 percent) of asset owners have outsourced certain functions so they can focus on value-adding activities in-house; with 37 percent outsourcing functions where they were unable to get scale quickly enough in-house.

Oliver Berger, ?head of Asset Owner Solutions & Strategic Market Initiatives, Sector Solutions EMEA at State Street said, “Given that mounting cost pressures and persisting lower-for-longer yields are systematic changes to the investment environment, it seems clear that the trends identified by our study will likely continue as asset owners strive to deliver better returns at lower costs to meet liabilities. Finding the right partners to work with, will be the key to ensuring this strategy of gaining scale, reassessing internal resources and reviewing external support pays off.”

Later this year, State Street will unveil a new benchmarking tool, which will allow its clients to benchmark themselves against the research findings and measure their preparedness for the future versus their peers.