Institutional investors and family offices in a recent survey cite digitization, aging population and climate change as the most important trends that will shape the global economic landscape in the coming decades, and are investing across these trends through both private and public markets.
Investcorp, a provider and manager of alternative investment products, conducted the survey in partnership with Mercury Capital Advisors, an institutional capital raising and investment advisory firm; IMD Business School; and Banque Pâris Bertrand, a Swiss-regulated private bank.
“Institutional investors’ view of the major trends that are to shape the global economic landscape over the next three decades can give us significant insight into where capital is likely to flow in both the near- and long-term,” Rishi Kapoor, Investcorp’s co-chief executive officer, said in a statement.
“In this year’s survey, we see digitization and AI as an area ripe for investment. An aging global population and ongoing concerns with climate change also provide ample opportunities for these investors to capture the economic upside associated with these mega trends either through direct investment or, more commonly, by allocating to external managers.”
Automation, digitization and AI boosted its position as investors’ top trend, shooting up 26 points from the inaugural survey in 2019 to 95% of investors. Fifty-three percent said they were likely to invest in this trend through a combination of public and private markets.
The majority of investors expect the automation, digitization and AI trend to be significant over the next two decades, with meaningful progress in key industry segments such as digital infrastructure, robotics and specialized chips occurring seven years from now, according to Investcorp.
But they are also cautious in their expectations, mindful of cyber risk, national data privacy laws and societal debate on the ethics of AI as factors that may disrupt developments in this trend.
Sixty-nine percent of investors in the poll again named an aging population as the second most important long-term trend, albeit down 9 percentage points from the 2019 survey. They expect it to remain important until at least 2050, perhaps indicative of both the large funding gap that exists today and the equally attractive investment opportunity it presents over the long term, Investcorp said.
They expect opportunities in health care services and retirement homes/medical centers to be meaningful in about 10 years. At the same time, investors believe that developments in local immigration laws, black swan events such as pandemics, natural disasters or war, or even a change in life expectancy or birthrates could all influence their investment outlooks.
Climate change ranked as the third most significant trend, cited by 65% of survey participants, unchanged from 2019. Investcorp said it was notable that nearly all investors expect climate change to significantly shape the global economy over the next two decades, consistent with global developments in addressing climate change risks and opportunities.
Sixty-three percent of participants said they were likely to invest in the impact of climate change through both public and private markets, as opposed to favoring one over the other.
About half of investors expect meaningful developments across several industry segments this decade, with the biggest opportunities occurring in the renewable energy and clean technology segments.
However, they cited changes to global political will and technological advances in battery storage or hydrogen as two key factors that may disrupt their current thinking on the significance of climate change as an investment opportunity over the very long term.
Furthermore, some investors specifically noted that changes in the condition of the Gulf Stream — one of Earth’s major climate-regulating ocean currents, which influences weather patterns and sea levels on both sides of the Atlantic — could disrupt the timeline and capital requirements, as well as the risks associated with climate-related investment opportunities.
The following round out the surveyed investors’ top 10 megatrends:
- Electric vehicles and autonomous driving: 62%.
- Personalized health care: 60%.
- Growing dominance of China: 59%.
- Digital and cryptocurrencies: 59%.
- Urbanization and smart cities: 38%.
- Sustainability and the circular economy: 37%.
- Redefining global trade: 26%.
Two of these trends are new to the list this year: China’s growing dominance and cryptocurrencies. Investcorp said this demonstrates that a significant portion of respondents see them not as short-term trends, but ones that are here to stay and deserving of significant attention and capital allocation.
It also pointed out that urbanization and smart cities and redefining global trade, two of the top five trends in the first survey, both decreased in significance this year to eighth and 10th places, replaced by autonomous and electric vehicles and personalized health care in fourth and fifth places.
Fund Allocation and Returns
According to the survey, investors continue to prefer allocating funds to external managers, the choice of 38.6% of respondents, regardless of whether the investment strategy is exclusively private, exclusively public or mixed. This compared with 21.8% who prefer direct investing and 18.4% who combine the approaches.
Twenty-one percent said they do not allocate to trends they see as important. They are not doing so mainly because of a lack of expertise, or they think it is too soon or they have not yet found credible investment opportunities.
Although 85% of investors either lowered or kept return expectations the same over the past year, their net target return expectations — particularly for private market-focused investors — were still higher than those who expressed more optimism about future returns.
The survey found that institutional investors were tilted toward either private or public markets. Private market-tilted investors, who made up 35% of the sample, had the highest expectations in terms of future overall target returns, exceeding those of public market-tilted investors, 42%, by 400 basis points.