Blog

The Future of Alternatives: The Industry in 2023

by Mark O'Hare

  • 23 Oct 2018
  • PE
  • VC
  • HF
  • PD
  • RE
  • INF
  • NR

This foreword is from The Future of Alternatives, Preqin’s crystal ball assessing the likely size, shape and make-up of the global alternative assets industry (meaning private capital plus hedge funds) in 2023. What will our industry look like in five years’ time?

First, it will be significantly larger than today:

  • 2023 global assets under management at $14tn (+59% vs. 2017)
  • 34,000 fund management firms active globally (+21% vs. 2018)

The drivers behind this growth are covered further in the report, and will be familiar to most of you:

  • Alternatives’ track record and enduring ability to deliver superior risk-adjusted returns to its investors;
  • Investors’ need for alpha, the aforementioned ability to find this in private capital vs. the difficulty of finding it in public markets, leading to widespread increases in allocations to alternatives;
  • The steady decline in the number of listed stocks, as private capital is increasingly able to fund businesses through more of their lifecycle;
  • The growing opportunities in private debt as traditional lenders decline;
  • The massive opportunity in emerging markets.

Could the $14tn forecast be too high? Possibly, but we believe there is significantly more upside risk than downside. There are several reasons for this; let me highlight four:

  • Technology (especially blockchain): will facilitate private networks and help investors and fund managers transact and monitor their portfolios, and reduce costs vs. public markets.
  • Control and ESG: investors increasingly want more control and influence over their investments, and the ability to add value; private capital provides this.
  • Emerging markets: the Chinese venture capital industry already matches that of the US in size; further emerging markets growth will be a ‘double whammy’ of GDP growth + higher penetration of alternative assets.
  • Private individuals: the ‘elephant in the room’, as the mass affluent around the world would like to increase their investment in private capital if only the structures and vehicles (and regulation) permitted; technology will help.

Preqin will stick with the $14tn forecast – but it is more likely to be too low than too high.

 

One factor in the success of the alternative assets industry in the past has been its ability to respond to change and evolve to meet new challenges. The next five years will likely see more rapid and significant changes than ever before, notable among which will be:

  • Routes to market: investors and fund managers alike see an increasing role for co-investments, separate accounts, direct investments by LPs and other structures;
  • Transparency and monitoring: the ‘triple whammy’ of growing allocations to alternatives, greater regulatory and governance oversight, and new technological possibilities is driving the increasing granularity of information that investors expect on their alternatives portfolios;
  • ESG: is increasingly mainstream as investors’ expectations grow, and as fund managers engage with ESG as a performance-enhancer, not just an added cost;
  • Emerging markets: will account for 50% of global GDP growth over the next 20 years; they will likely account for more than 50% of alternative assets growth.

Preqin is investing heavily to evolve our offering to meet the growing needs of you, our customers, in the global alternative assets industry. Three particular themes:

  • Data: is the core of everything we do, and we are investing globally to continue building and improving the dataset, most especially in emerging markets.
  • Technology: we are investing in technology right across the value chain – data sourcing and management, our brand new ‘Preqin Pro’ customer platform, and data science to drive new insights for our customers. 
  • Monitoring, Valuation and Fund Analysis: through our Preqin Solutions business we are at the forefront of innovative new services to assist fund managers and investors.

Data is vital; but individual expertise and talent are what translate data into insight and value; we are extremely grateful to over 20 of our friends from across the industry who have kindly contributed their insights to this report – all of them experts in their field. Thank you to all. 

We hope you find The Future of Alternatives useful and, as always, thank you for your continued support and engagement. 

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