Future of Alternatives 2025: The Recovery from Long COVID

The effects of the COVID-19 pandemic will last many years, but not all will be detrimental to the alternatives industry

As 2020 draws to a close, hopes are rising that an effective vaccine will allow life to return to normal. But normal after COVID-19 will likely look very different to normal a year ago.

Alternatives have not escaped the virus. For the first time this century, assets under management (AUM) will be lower at the end of the year (forecast at $10.74tn) than they were at the start ($10.82tn). Deal volumes and values will be down across asset classes, with the notable exception of venture capital, where aggregate deal value surpassed 2019’s $285bn in November, according to Preqin Pro. The widespread deployment of loan support for companies and monetary easing means that the extent of problems within the corporate sector is difficult to access. But, if the experience of the Global Financial Crisis (GFC) is any indicator, private capital-controlled companies will outperform.

Considering the unprecedented disruption, transactional processes have functioned remarkably well. In many ways, the main impact of the pandemic has been to accelerate already established trends. For example, the number of private equity and venture capital funds closed each year has been declining since 2017, while their average size has increased in tandem (Fig. 1). With face-to-face meetings impossible, LPs have committed larger amounts to managers they already have relationships with, making fundraising exceptionally difficult for newer managers.

Investors and fund managers transitioned well to remote working and video calls, while much of the machinery of investment, such as virtual data rooms, was already in widespread use. In some respects, the ease, efficiency, and intimacy of electronic communications have deepened existing relationships, with GPs now in much more frequent contact with their LPs. Segments such as real estate have faced particular challenges around the necessity for physical inspections of sites, but in other areas industry players have successfully adopted alternative methods of conducting due diligence, such as drones.

Adapting to the New Environment
The mechanics and practice of investing are unlikely to return to pre-COVID norms. While face-to-face meetings will remain crucial to establishing new relationships for both investors and managers, a larger proportion of ongoing relationship management will take place online. And while there is little sign that the trend of capital consolidation will slow, we would expect to see more new and first-time managers successfully closing funds in 2021. Almost three-quarters (73%) of investors surveyed by Preqin intend to increase their number of fund manager relationships over the next five years.

The Lasting Legacy of COVID-19
The pandemic will have impacts that stretch beyond the virus and its economic effects. Canada Pension Plan Investment Board (CPPIB) says it could trigger a generational shift in attitudes, as we saw with the thriftiness of those that lived through the Great Depression, the stoicism of the WWII generation, or even the reduced spending habits of the cohort who entered the workplace during the GFC.

Not all COVID-related changes will be negative for alternatives investors. The digital transformation agenda has been accelerated across many industries and we expect this to be a value creation lever for investment firms. Some fund managers, such as Australian private equity firm Adamantem, found that their ESG assessments formed the basis of their COVID response in areas such as diversifying supply chains.

Investment sectors such as edtech and healthtech have been turbocharged by the pandemic. Aggregate venture capital deal value in healthcare was a shade below $10bn in each quarter of 2019, but in 2020 rocketed to $17bn in the third quarter (Fig. 2). The rise is mostly explained by increasing ticket sizes, with the average deal value rising from less than $20mn to more than $30mn in both the second and third quarters of 2020. Medical practices enforced by the pandemic and encouraged because of it, such as virtual doctor’s consultations, will become much more common.

Ultimately, we expect alternatives to come out the other side of the pandemic in a strong position, at least in terms of the size of the industry. Probably the biggest legacy will be the continuation of ultra-low interest rates, which will force investors of all shapes and sizes to take a closer look at alternatives as means of meeting their funding obligations and liabilities. After a brief pause, we expect AUM in alternatives to resume growing and reach $17.16tn in 2025.

Download a data pack containing all the charts in our regional articles for Future of Alternatives 2025. For more predictions and projections from Preqin on the future of the alternatives industry, visit our Future of Alternatives 2025 Content Hub.