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OPINION

WeWork’s failed IPO shows the danger of allocating to private equity

Investors fearful of higher geopolitical risk and lower economic growth may be making a mistake if they consider private assets as the best way to generate returns.

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At the end of September, Schroders released the findings of its third annual survey exploring the key concerns, return expectations and thoughts on allocation of 650 of the world’s largest end investors – including pension funds, insurance companies, endowments and foundations – together responsible for $25.4 trillion of assets.

It’s a troubling read.

Fear is overtaking greed. Investors are now much less concerned about rising rates and monetary policy tapering and more about a global economic slowdown and in particular about geopolitics. Trade wars and Brexit are now the biggest worry for 52% of investors, up from just 32% two years ago.

Yet they still claim to be confident in meeting high total return targets over the next five years. Fully 67% expect to deliver 5% returns, with 77% of north American-based investors expecting to generate 5-9% returns and 13% of Asia-Pacific investors even targeting returns over 10%.

How?

The big shift in asset allocation is towards private assets, which 52% of these large investors expect to devote more money to, rationalizing that the high fees, poor liquidity and structural complexity are risks worth taking for the higher expected returns.