Alternative investments will hit record $14 trillion AUM in 2023.

What about PE?

The popularity of the alternative investments space does not come as a novelty in a period in which investors increasingly seek to shy away from the less attractive returns of traditional asset classes. The news is however, that forecasts see the industry hitting a record $14tn AUM mark in 2023, growing by +59% (i.e. c.8% CAGR) from the $8.8tn recorded at the end of 2017. If we think that, merely ten years ago, assets managed by alternative investors stood just north of $3tn, growth has already been outstanding.

Key drivers for growth in alternative investments include investors’ need for yield, the long-term outperformance of private capital compared to public markets, the growing appetite for alternatives from institutional and private investors, and strong growth in emerging markets.

“Fourteen trillion dollars may sound like an overly ambitious prediction for the alternative assets industry, but it is lower than the average growth rate we’ve seen in the past decade, hence extremely likely to happen” comments Preqin’s CEO Mark O’Hare. According to the latter, other trends shaping the alternative’s industry besides the proven long-term performance, are the growing opportunities in private debt and the rise of emerging markets in which alternative funds are already entrenched.

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The asset class claiming the largest share within alternatives is obviously Private Equity, with an expected increase of +58% (i.e. c.12% CAGR) over the next five years from $3.1tn to $4.9tn AUM overtaking hedge funds that instead will grow by +31% (i.e. c.7% CAGR) from $3.6tn to $4.7tn. More interestingly, the rise of private debt will see the market for this asset double in size (e.g. expected at $1.8tn in FY2023) growing organically thanks to allocator interest no longer for traditional bank lending but for private capital. Real assets instead, although representing a smaller portion of the alternative investment universe at this moment (i.e. c.8% according of the total according to Preqin), are expected to be the fastest growing set of assets over the next five years.

Anna Gervasoni (Director General of AIFI – Italian Private Equity, Venture Capital and Private Debt Association and board member of Fondo Italiano d’Investimento) emphasizes this positive trend claiming that: “private capital and private equity will become more convincingly part of institutional investors’ asset allocations in the coming years”.

Performances have their say in this. According to Preqin, buyout funds have recorded performance of 5 ppts greater than those recorded by the S&P500 since 2000 and better than any other institutional asset class. Performance-based metrics remain a key driver in asset allocation towards alternatives says Michael Murphy (Managing Director and Private Equity Global Co-head at Credit Suisse):“I expect to see this trend rise even more leading to a more mature secondary market that will reduce the perception of illiquidity of these assets”.

But where does this growth come from? The most important sources of the incremental flows to alternative investments will be family offices, sovereign wealth funds and pension funds. These funds are starting to believe they can run their own money, rather than outsourcing to large asset management companies because they now “manage more capital, are more sophisticated and have greater expertise in-house than was the case prior to the global financial crisis” comments Michael Stirling, CEO of Stirling Infrastructure.

There are expected to be way more fund managers available for LPs to choose from in 2023, bringing the total number of alternative investment funds to a staggering 34,000! At that point, the ability of picking the right guy (fund) will be crucial, even more than today.

 

Sources:

Il Sole24Ore, https://www.ilsole24ore.com/art/finanza-e-mercati/2018-10-31/fondi-alternativi-l-industria-arrivera-14mila-miliardi-dollari-2023-131834_PRV.shtml?uuid=AEj7ojYG

Institutional Investor, https://www.institutionalinvestor.com/article/b1bg5lknj62d7l/Report-Alternative-Investment-Industry-Will-Hit-14-Trillion-By-2023

Preqin report “The Future of Alternatives”, https://www.preqin.com/insights/special-reports-and-factsheets/the-future-of-alternatives/23610

Bebeez, https://bebeez.it/files/2018/11/Alternative-Timeline.pdf

 

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