A year ago, we wrote a blog examining the prospects for the alternatives sector as economic and geopolitical conditions deteriorated. Amid sinking global markets as inflation, interest rate rises and global growth worries took hold, the outlook for alternative asset managers remained positive.
A year on, the long-term value the global alternatives industry offers to investors, and the opportunities that presents for managers and their service providers, look even greater.
Private market opportunities
Private markets remain a particular focus. According to a recent Casey Quirk/Pensions & Investments survey, institutional asset owners plan to expand their allocations to private markets and liability-driven investments, mostly at the expense of passively-managed equity and bond holdings.
Almost three-quarters of the institutional investor respondents to BlackRock’s Global Private Markets Survey aim to up their allocations to private equity this year—43% of those substantially so. More than half said they also plan to boost their allocations to private credit, real estate and multi-alternative solutions.
Private debt has gone from strength to strength since the Global Financial Crisis. The latest edition of Coller Capital’s Global Private Equity Barometer found almost half (44%) of respondents intend to raise their private debt allocation over the next 12 months, up from 37% in the report’s Winter 2022/23 edition. Investors are similarly upbeat on infrastructure.
Meanwhile, the Coller Barometer reported that the majority of Limited Partners (LPs) believe 2023 and 2024 will be strong vintage years for private equity in North America and Europe. Higher interest rates may drag on PE performance, but current economic distress is throwing up a new wave of investment opportunities at more attractive valuations. An earlier Preqin survey of Middle East investors found approximately three-quarters of respondents said the performance of their private equity, private debt, real estate and infrastructure investments had met or exceeded their expectations.
After a rocky period, the hedge fund industry is holding up well too. Total hedge fund assets increased for the third consecutive quarter in Q2 2023, according to the latest Hedge Fund Research figures, as investors allocated new capital and hedge funds extended year-to-date gains. The uptick comes as the Canada Pension Plan Investment Board, Canada’s largest pension fund with $570 billion in assets, will reportedly seed more start-up hedge funds this year as part of a plan to diversify its investments.
Managers advised to adopt alternatives approach
On the supply side, the Boston Consulting Group also highlighted alternative investments as a bright spot for asset managers in a recent report.
While strong market performance in traditional assets spurred asset manager revenue growth for nearly two decades, global assets under management fell 10% to $98 trillion in 2022. Firms should instead consider entering the alternatives space and offer private market products for retail and institutional investors, BCG advised. Despite comprising about 20% of the asset management industry’s AUM, alternatives account for half its global revenues. And the sector offers high-growth opportunities, with a CAGR of 7% in alternative assets expected over the next five years.
In an “era of market uncertainties, fee compression, rising costs, and technological change,” asset managers should seek to bolster their profitability as well by optimising costs throughout the organisation, rather than just trying to cut expenses, it added.
Tough operational questions
A push into alternatives doesn’t just require investment and distribution expertise though. The operational complexities mean managers need the right technology and investor servicing support to thrive.
The biggest challenge to successful fundraising for alternative fund managers comes from the evolving regulatory environment, according to new research from alternative fund services provider Ocorian. The impact of global reporting burdens, including increased scrutiny from regulators over sustainability practices and reporting, ranks second.
Meeting these demands takes multi-level, multi-jurisdictional solutions. Anti-money laundering (AML) and know your customer (KYC) requirements are ratcheting higher in markets around the world. FATCA and CRS reporting rules continue to change and grow. The EU’s Sustainable Finance Disclosure Regulation (SFDR) and Markets in Crypto-Assets Regulation (MiCA) are now in force and AIFMD 2 is coming down the pike.
It’s not just regulators seeking greater control and transparency either. Investor calls for customised reports offering granular breakdowns of activity, positions and valuations, delivered through a multi-functional web portal providing access to reports, real-time analytics and two-way fund/investor communications are only set to grow.
Attracting allocations increasingly depends on satisfying such expectations. And managers are looking to their fund administrators to provide them. Will your infrastructure be up to the task?
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