More money to flow into alternatives but lower returns expected

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Institutional investors expect to allocate more to their various alternatives strategies in the next 12 months, on average, in every asset class except hedge funds, according to latest survey by the global alternatives research firm Prequin. But most have lowered their sights on expected returns.

Infrastructure will get the biggest increase, with 43 per cent saying they will lift their allocations compared with the past 12 months and only 8 per cent planning to reduce their allocations, according to the Prequin survey of 530 institutional investors in its ‘Investor Update’ series.

Next up was private debt, with 31 per cent planning an increased allocation, followed by real estate and natural resources (both 30 per cent) and then private equity (29 per cent). For hedge funds, only 16 per cent said they would increase their allocations compared with 19 per cent saying they planned a reduction.

Some key themes emerged from our conversations with investors:

  • Institutional portfolios of alternative assets are growing more diverse: In June 2015, 39 per cent of the institutions tracked by Preqin allocated capital to three or more different alternative assets; today, that figure stands at 50 per cent. Diversification is the primary reason why investors have stepped into alternative assets, above high absolute returns.
  • Investors’ needs from alternative assets are changing:
    Asset pricing and high valuations are a concern across many private capital asset classes, with many investors believing equity markets have peaked. Investors, which have often seen performance above expectations in recent years, believe that the opportunity for outperformance may be constrained going forwards. Across private equity, real estate and infrastructure, investors’ return expectations have fallen significantly since 2015.
  • Interest in emerging markets and Asia is growing:
    Although North America and Europe continue to dominate investor thinking for their alternative assets portfolios, Asia and other emerging markets feature highly on the agenda across alternative asset classes. With concerns around high pricing in developed markets, investors are looking elsewhere for new opportunities.

The survey respondents have reduced their average of returns sought, since 2015, in each asset class except hedge funds, which was steady, and private debt, which showed a slight increase. Private equity showed the biggest reduction in returns sought, falling from 14.1 per cent a year in 2015 to 11.6 per cent three years later, followed by infrastructure, which was down from 9.5 per cent to 7.7 per cent.

Most asset class performance in the past 12 months either met or exceeded expectations, led by private debt and real estate followed by private equity. Hedge funds were the most disappointing for performance over the year, according to the survey.

The make-up of the respondents by region was: North America, 54 per cent; Europe, 29 per cent; Asia Pacific, 15 per cent; and the rest 3 per cent. The investor type included asset managers (21 per cent), family offices (17 per cent), private sector pension funds (15 per cent), public pension funds (11 per cent) and insurance companies (9 per cent).

– G.B.

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