Will Real Assets Eat PE’s Lunch?

It’s a bold prediction with big implications for private equity: real assets will increase from roughly 10 percent to 25 percent of institutional allocations over the next decade.

That’s the view of Joe Azelby, global head of J.P. Morgan’s real asset investment group, a perspective he shared during a recent MSCI private client event in New York.

“I think we’re moving into a new place around the concept of real assets,” Azelby said. “It’s a new ‘omnibus’ asset class.”

Given historically low bond yields, institutional investors will need to think beyond real estate, with its boom and busts, for income and inflation protection, Azelby said. The solution is to invest in assets such as timber, regulated utilities, and shipping, which share some fundamental characteristics with real estate, but have uncorrelated performance.

“Every 10 years, real estate punches you in the face,” he said. “It’s cyclical, and if it’s levered and if it’s levered a lot, it can be a painful experience.”

So investors should consider real estate just one part of a broader real asset portfolio, and understand that real estate and TIPS aren’t the only way to protect against inflation.

“Real assets give you inflation protection at no cost,” Azelby said. “It’s like free life insurance.”

Increasing allocation to real assets would come at the expense of fixed income and equities, which Azelby defines broadly to include both public and private equity. So while many PE shops have diversified into real asset investing, those that haven’t risk losing out.

For Azelby’s full perspective and supporting documents, here’s the full slide presentation:

Joe Azelby keynote address from Privcap

Joe Azelby, global head of real assets at JP Morgan, says real assets will take up an increasingly large slice of institutional investment allocations.

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