The performance of private vehicles since the financial crisis has been a key driver of the growth of the industry. For private capital funds of vintage 2008 and onwards, the net IRRs since inception have, on average, exceeded 10% (with the exception of natural resources strategies).
This consistent strong performance has led to record levels of distributions in recent years as the level of capital distributed by GPs to LPs has exceeded the level of capital called in each of the past five years. As investors continue to receive distributions, the challenge for LPs is how to re-invest this capital, and many look back to the private capital industry. It is this re-investment by liquid LPs that has driven up the level of capital available to fund managers and spurred further growth in the private capital industry’s assets under management in recent years.
Given the greater liquidity in the hedge fund industry, asset flows are more volatile than those seen in the private capital market. After a period of underperformance in the hedge fund market, 2016 saw investors withdraw a net $110bn from hedge funds as they sought to evaluate their hedge fund holdings. It is this underperformance and negative sentiment that caused a slight tapering in the growth of the hedge fund industry, growing just 4% and 3% in 2015 and 2016 respectively, compared to growth of 8% in the private capital industry in each of these years.
However, as hedge fund performance improves – as it has done since the turn of 2016 – so too does investor sentiment, with investors allocating a net $44bn to hedge funds in 2017. Investors may well be in doubt as to whether this improved performance will continue, as the hedge fund market is predicted to experience the slowest rate of growth in the next five years. Meanwhile, the private debt and infrastructure industries are set for strong growth as liquid LPs look to increase their allocations to these areas of the alternatives universe.
*Natural Resources includes Natural Resources and Timberland funds only to avoid double counting.
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