Preqin published its Alternative Asset Outlook for the second half of 2015 with interesting results. It is clear that investor confidence on alternative assets and their ability to provide strong returns remains strong, but there are some interesting differences when it comes to different asset classes.
Private equity looks to be gaining more interest in the second half of the year, with a little over 50% of respondents in Preqin’s survey stating they look to increase investment allocation in the asset class. Nonetheless, investors also feel private equity’s performance did not manage to meet expectations in the previous 12 months.
Alternative Asset Plans
According to the findings, private equity is set to see an increase in allocations, with just 5% of investors in this asset class planning to reduce their investments. On the other hand, hedge funds could see a decline in allocations, as 22% of respondents felt they would reduce investments in the asset.
While the above looks at investors’ long-term plans, private equity is expected to do well even in the short-term. Around 42% of investors are likely to increase their investment in the asset class in the next 12 months. Hedge funds, on the other hand, are attracting only 19% of extra capital in the short-term.
Interestingly, there are big differences in the reasons investors invest in these two asset classes. Hedge fund investments are driven by investor appetite to diversify their portfolio, reduce volatility in the portfolio and the fact that hedge funds have low correlation to other asset classes.
Whilst diversification remains a driver behind private equity investment, investment decision on this asset class are mainly driven by trust in returns. Investors mentioned both high absolute returns and high risk-adjusted returns as driving factors behind private equity investment.
Mark O’Hare, chief executive at Preqin, was quoted in Think Advisor stating, “The high absolute returns generated by private equity, hedge funds’ ability to reduce volatility, the reliable income generated by private debt and the inflation-hedging characteristics of real assets are just some of the attractions for sophisticated investors.”
Investor Views on AIFMD
The Alternative Investment Fund Managers Directive (AIFMD) was set up by the European Union in 2011. The aim was to try to standardise the alternative investment sector and harmonise the industry. But the AIFMD has remained a debated topic and investor sentiment remains mixed.
The Preqin survey found nearly half of investors remain unsure about the impact of the AIFMD. A slight majority of 28% of investors view it has done good for the industry, with 23% viewing it in a negative light.
The benefits of the AIFMD are mentioned to be its ability to provide more transparency on the asset funds and the ability to provide more protection for the investor. But nearly 50% of respondents believe it is still an unnecessary regulatory hurdler there to protect the qualified investors. The concern is that limited investor choice, together with higher fees, could be the result of the framework.
Investors Maintain a Positive Outlook in Private Equity
The first half of 2015 might have seen an increase in dry powder, but investor appetite continues to remain positive. While outlook on the sector stays positive, investment levels, in terms of enhanced equity allocation, have slightly dropped from those of last year. 52% of investors made a commitment to the asset class during the first half of 2015, while this stood at 62% last year.
On the other hand, 60% of investors are considering a new equity commitment either in the latter half of the year or in 2016. More interestingly, only 29% of investors were looking to increase their allocation to private equity in the following 12 months in the first half of 2014, while 42% of investors now say they will.
As we’ve talked previously, it is obvious co-investments are the next big thing in alternative asset industry. Preqin’s findings show nearly 22% of investors are likely to increase their direct investments through co-investments.
Investor Strength In Return Expectations in Private Equity
The asset class does well in terms of outperforming public markets in the long-term, but Preqin’s analysis has also looked at the investor expectations in the short-term. The mood dipped slightly last year, with 35% of investors expecting private equity to beat public markets by over 4% in 2014. The previous year the proportion had stood at 49%.
But investors are finding the trust again; with 49% of investors saying, they expect the asset class to perform 4% better than public markets. Furthermore, nearly 40% of investors expect the investments to beat the public markets by more than 2.1%, although by less than 4%.
This result could be driven by met expectations in the asset class. Around 35% of investors see private equity investments of having exceeded expectations, with 52% saying their expectations have been met, although not exceeded.
Perhaps interestingly, there is a lot disparity in satisfaction levels when it comes to the regions. European investors seem to be the most satisfied, with 50% of investors stating private equity fund investments have exceeded expectations. On the other hand, 43% of Asian investors and 35% of North American investors agree with the sentiment. The rest of the world falls behind with only 25% stating private equity fund investments have exceeded expectations.
But the image seems to be a bit mixed in Europe, since it also has the highest proportion of investors who feel the asset class has fallen short of expectations. While 19% of European-based investors claim this, only 9% of North American investors feel the statement is true. The proportions for Asian investors stood at 14%, while 13% of investors in rest of the world felt private equity funds failed to meet expectations.
Favoured Fund Types and Locations
Similarly to Setter Capital’s latest report, when it comes to private equity funds, investors still prefer small-to mid-market buyout funds, according to Preqin. These buyout funds remain the asset type most investors are seeking to invest in the coming year, as well as the sector where investors view the best opportunities are available.
In terms of regions, investors seem to prefer investing in private equity funds based in their own region. 61% of North American investors view North America-based LPs as the most attractive, with 75% of European investor viewing the Europe-based LPs favourable and 66% of Asian investors preferring Asia-based LPs. In terms of the rest of the world, 71% of North American investors view the funds based on these countries as attractive, while Asian investors continue to avoid funds based on these countries.