A useful starting point is to remind ourselves of the reasons investors have for allocating to each of the alternative asset classes. As the chart on the following page shows, investors’ motivations are quite distinct across alternative assets: high absolute and risk-adjusted returns in private equity & venture capital; an inflation hedge and reliable income stream in infrastructure and real estate; high risk-adjusted returns and an income stream in private debt; diversification and low correlation with other asset classes in hedge funds and natural resources.
Set against these objectives, it becomes clear why investors have not only consistently increased their allocations to alternative assets over the past decade, but also why they are planning to continue to do so in the years ahead (not to mention the growing number of investors that come into alternatives each year – i.e. growing ‘participation’). Their intentions to increase allocations are perhaps unsurprisingly strongest in those asset classes that have delivered performance ahead of expectations in recent years – private equity & venture capital, private debt, infrastructure, real estate. Yet, investors are also expressing the same upwards allocation intention in the areas where recent performance has disappointed – notably hedge funds and natural resources: the diversification and low correlation offered by these assets may be especially attractive in a challenging returns environment.
Investor memories go back to the Global Financial Crisis, and many of you will remember the obituaries that were being written in advance for private equity as the crisis unfolded (all those companies bought at high valuations with excessive debt etc.). What actually happened? Yes, there were some notable blow-ups, but private equity and alternative assets more generally had a ‘good crisis’: the PrEQIn indices show the facts – an investor with a diversified portfolio across the private capital asset classes outperformed public markets.
Investors therefore recognize that alternative assets have delivered good performance relative to public markets through bad times as well as good; and hence they are generally ‘sticking with the program’ and continuing to increase their allocations in the likely challenging environment ahead. Preqin is sticking with its forecast for further growth of alternative assets to 2023: from $8.8tn in assets under management in 2017 to $14.0tn in 2023.
Will the growth of the industry over the next five years be smooth and free of challenges? Absolutely not. Alternative assets face many challenges, from the current stretched valuations in most parts of the market; intense competition for assets, driven in part by the dry powder available to fund managers that needs to be put to work; intense competition for capital, with more new funds on the road than ever before; growing pressure from investors for their fund managers to deliver value for money and to demonstrate compelling strategies for creating value with the current high entry valuations; and issues specific to each individual asset class – most notably the concerns around credit funds in an environment of reduced covenants and potentially increasing interest rates.
The alternative assets industry has a long-demonstrated ability to adapt and evolve to respond to challenges like these. Fund managers are adept at evolving their strategies and routes to value creation to respond to market opportunities and challenges; investors are becoming increasingly skilled and sophisticated at evaluating and assessing the growing opportunity set in the market; and advisors are raising their game in offering services to add value to their GP and LP customers.
A key ingredient in such selective strategies – for GPs, LPs and advisors alike – is of course good information. Preqin is honoured to be a partner and supplier for so many leading firms and professionals in the industry, and we continue to invest heavily to expand and improve our data and services. Alternative assets are our sole focus. We are grateful for your support, and we hope that you will find this report and the individual 2019 Preqin Global Alternatives Reports in each asset class to be a helpful resource and support for your work.