Alternatives have matured over the past 30 years, gaining greater attention and acceptance from both investors and regulators to become mainstream investments.
The alternatives industry had a record US$9.5 trillion in assets under management (AUM) in December 2018 (US$3.45 trillion in hedge funds; US$6.05 trillion in private capital), with Preqin predicting this will rise to US$14 trillion by 2023 as asset owners continue to diversify their portfolios to reduce volatility and seek new ways to increase returns.
AUM Growth of Alternative Assets Globally1:
Private capital dry powder stood at US$2.11 trillion in December 2018, with a steadily increasing proportion of available capital focusing on Asia. The region accounted for 9% of total dry powder in 2006, and this doubled to 18% in 20182. Preqin noted that investors remain upbeat about the performance of alternatives, but are less optimistic about the future. High equity valuations and huge levels of dry powder suggest many investors worry that equity valuations are peaking, and that a market drop is imminent. While hedge funds can be disappointing to investors as an asset class, investors have also seen the possibility of these vehicles weathering volatile and potentially falling markets. Four trends will play out as the alternatives industry matures.
Although fundraising has slowed, private equity returns remain appealing for institutional investors given the low yield environment. According to Preqin data, private equity will overtake hedge funds to become the largest alternative asset class by 2023, growing by 58% to US$4.9 trillion AUM vs a forecast of US$4.7 trillion for hedge funds.
Real estate, infrastructure and private debt remain compelling assets with strong returns. The application of AI, big data and ESG are likely to help meet investors’ needs for transparency and increased granularity when reporting on investments. In addition, healthcare, fintech and AI are up-and-coming targets for venture capital.
The impact of digital assets will be seen across private markets, especially real estate, in the coming years. This shift is poised to fundamentally alter for the better how capital is deployed, increasing transparency and liquidity, and bolstering risk management.
Digital innovation is beginning to address the needs of the property industry, with blockchain as one of the most talked about of the so-called ‘proptech’ technologies. The process of digitizing real estate assets through the creation and sale of tokens will provide real estate owners and developers with access to domestic and global markets that were previously unavailable due to barriers inherent in the traditional process of raising capital.
For example, tokenizing limited partner commitments to real-estate funds that can be traded on secondary markets, thereby accessing a broader base of liquidity options and opening up access to retail investors.
According to Ajay Narang, Head of Asia Sales at Preqin, China will emerge as a major source of alternative investment capital in the next five years, with Southeast Asia and China as key global investment targets.
Emerging Asia, which includes Southeast Asia, needs basic infrastructure, such as roads, bridges, hospitals and power plants.
Such assets have traditionally been funded by governments or multilateral organizations such as the Asian Development Bank. Although these funding sources remain important, they are no longer sufficient to meet the region&r
Managing Director and Co-Head of APAC
Alternative Investment Management Association
Investing in loans, whether they be widely syndicated leveraged loans or private debt, is a booming area of the investment landscape. Private debt assets were US$768 billion as of the end of the 2018, having grown 223% over the previous decade, according to the Alternative Credit Council (ACC). As banks have reduced their lending activities, credit managers have stepped up to fulfill demand. Furthermore, institutional investors are increasing allocations to private credit, which has demonstrated a record of attractive returns and risk profiles. According to Cambridge Associates, private credit has delivered average annual returns of 8.75% during the past five years and 10.42% during the past 20 years.
Continued growth in this market will require managers to address regulatory requirements and investor demand for transparency. 82% of respondents to a recent ACC survey said transparency and reporting are one of the most important factors in achieving alignment of interests with their investors.
The ability to accurately measure positions using standardized, comprehensive analytics can help managers differentiate themselves in a competitive market. However, this will require managers to tackle issues related to timing, restructuring and loan-tracking systems that are not typically integrated with accounting systems.
With the right investment in tools and technology, either in-house or through the scale of an external service provider, credit managers can achieve the efficient, accurate and insightful performance and risk analytics that their front offices require and their investors expect.
Global Head of Alternatives