In uncertain markets, endowments, foundations and healthcare investors are still committed to private equity

More than half (53%) of non-profit institutional investors are increasing allocations to private equity as a means of generating much-needed returns amid volatile markets and mounting macro risks.

From elevated inflation to the outbreak of the war in Ukraine and a painful global selloff, 2022 has presented endowments, foundations and healthcare investors with a series of challenging market and macroeconomic conditions. To understand how these investors are approaching the current investment landscape, BlackRock collaborated with Coalition Greenwich to conduct a research study of U.S. endowments, foundations and healthcare investors between early February and late March 2022.

“In 2022, mitigating macroeconomic risk has been a top priority for non-profit investors – even more so than interest rate risk,” says Lili Forouraghi, CFA, Head of U.S. Endowments and Foundations, BlackRock. “We’ve been working closely with clients who are increasingly looking to implement more diversified private assets into their asset allocation programs while managing costs.”

Investors cited inflation, rising interest rates and drawdown risks as primary risk factors. Russia’s invasion of Ukraine amplified these macro concerns. The portion of survey participants who said mitigating inflation was a top investment objective rose by 11 percentage points after the invasion, while the percentage calling rising rates an important investment concern increased by eight points. As the investors position their portfolios for these risks, they favor real estate, public equities, inflation-indexed bonds and natural resources to address inflation, and value stocks, real estate and floating-rate debt to position for rising rates.

Retaining a Risk-On View

The conflict in Ukraine also heightened concerns about the potential for outsized losses. However, fears of major drawdown have not caused these investors to abandon risk. Despite worries about the macro environment, almost half of investors remain focused on generating idiosyncratic returns and maintaining a risk-on view. Private equity is the alternative asset class of choice for more than three-quarters of study participants, and more than half are increasing allocations to private equity to support a risk-on view. Almost one-third indicated an intention to increase their private equity allocations by up to 10%, and nearly one-fifth are looking to boost exposure between 10% and 20%.

Nonprofits Prefer ESG Integration Over Exclusionary Screens

For non-profit institutions who have adopted environmental, social and governance (ESG) standards or goals in their portfolios, a majority (more than three-quarters) prefer to incorporate ESG factors into their overall investment process, while using negative or exclusionary ESG screening was the least-popular approach.

ESG adoption has gained traction across the non-profit segment, with roughly half (49%) of non-profit institutions adopting ESG standards or goals in their portfolios, but some investors are reserving judgment. One-quarter of the investors not currently employing ESG indicated that they plan to adopt responsible investing practices within the next five years. However, four in 10 respondents are not planning to integrate ESG, citing challenges with implementation and incorporation. About another 40% of non-ESG investors remain unsure whether they will implement ESG in the next five years.

Survey methodology

BlackRock partnered with Coalition Greenwich to conduct a research survey of endowments, foundations and healthcare systems investment priorities. A total of 87 U.S.-based investors — 31 endowments, 31 foundations and 25 healthcare systems — completed a 38-question online survey over a ten-week period from February 7, 2022. The online survey was complemented by in-depth phone interviews with CIOs and senior decision-makers at six institutions: a private university endowment, a public university endowment, two foundations and two healthcare systems.

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