Global institutional investors have increased their allocations to private markets by 12.5 per cent of overall portfolios, with private debt emerging as a growing area of interest for defined contribution (DC) funds, according to new research from Aviva Investors.

The firm’s Private Markets Study found that 88 per cent of global institutional investors plan to increase or maintain their private markets allocations over the next two years.

More than three-quarters of respondents said diversification of risk and returns was the main reason for investing in private markets, while 55 per cent cited the presence of an illiquidity premium.

The survey covered 500 global institutional investors across the UK, Europe, North America and Asia Pacific, representing $6.5tn (£3.6tn) in assets under management.

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The study also found that DC schemes now account for 59 per cent of total pensions assets across the seven largest retirement markets. Overall, 72 per cent of DC funds globally said adding private markets assets to accumulation portfolios would deliver better performance for members, with European investors the most supportive of this view at 73 per cent.

Where DC funds have added private markets assets to their default funds, real estate (59 per cent), private debt (48 per cent) and private equity (43 per cent) were the most commonly adopted asset classes.

Within private debt, investors across all three regions said asset-backed lending and opportunistic and distressed debt were the sub-asset classes most likely to offer attractive risk-adjusted returns over the next two years.

“The rise of private credit is another fascinating trend within this year’s data,” said David Hedalen, head of private markets strategy and research at Aviva Investors. “This is no longer a substitute for bank lending but instead is a specialised and differentiated asset class which has become increasingly sophisticated and the routes to market more heterogeneous. Ultimately, we see a strong case for strategies such as multi-sector private credit for this reason, which can pivot across sectors and capital structures as relative value shifts.”

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North American institutional investors currently hold the highest average allocation to private markets, with 14.4 per cent of portfolios invested in the asset class. European investors follow with 12.1 per cent, while Asia Pacific allocations stand at 11.9 per cent.