3. What Drives and Constrains Direct Investment?:
3.4 Sizing direct investments
In this subsection, we provide an estimate of how widespread direct investing is today and discuss our methodology. It is recognized that making an estimate risks implying that the knowledge of how much is invested directly is more precise than it is.32 Nonetheless, it is useful to provide a baseline for analysing the impact of and outlook for direct investing.
The starting point is an estimate of the global institutional asset base which is refined based on the estimated potential capability for and desire to invest directly in illiquid assets by sovereign wealth funds, pension funds, insurers, family officers, foundations and endowments.
Estimating the global institutional asset base
We started by estimating total institutional AuM globally, which we estimate to be approximately $70 trillion in 2013.
Broken out by geography type of institution, the Americas represent approximately 40% of AuM with more than half derived from public and private pensions. Europe, the Middle East and Africa (EMEA) represents approximately 36% of AuM with insurance and pensions representing the two largest segments. Asia-Pacific (APAC) represents approximately 24% of the total global institutional assets — and is growing strongly — with assets concentrated in insurance, pensions and sovereign wealth funds. Additional detail is provided in Figure 14.
Identifying institutional direct investments
Applying a “what, who and why” framework then helped to estimate the amount of the approximately $70 trillion that is directly invested by institutions (Figure 15).
• “What” filter – First, non-life-insurance assets and defined contribution pension funds were excluded from the overall asset base, since these investors do not make significant direct investments. Applying the asset allocations adopted by the remaining institutional segments per region implies that approximately $6.1 trillion of institutional assets are in illiquid assets, above all real estate, infrastructure equity, private equity and emerging alternatives.
• “Who” filter – Next, institutions unlikely to be able to make direct investments because of their small size were screened out, with some adjustments for family offices and other exceptions, leaving roughly $3.0 trillion in assets.
• “Why” filter – Then, extensive interviews and a detailed view of the investment landscape were used to identify institutions not having the governance structures and beliefs necessary to support direct investing. Finally, desk research and interviews were used to identify the volume of assets held by institutions motivated to make direct investments. This final filter reduced the amount of assets likely to be invested directly to about $700 billion, or approximately 1% of the total institutional asset base.