Institutional investors continue to look for alternative assets and they are increasingly keen to invest in a variety of asset classes, according go the latest report by Preqin. The number of investors committing to more that four asset classes has increased in a year. While investors are dissatisfied with some classes, private equity appetite remains strong.
Preqin’s H1 2017 Investor Outlook studied institutional investors and their current mood for investing. The report’s key takeaway is investors’ desire to diversify their alternative asset portfolios. One-third of investors are investing in four or more asset classes, which is higher than the number one-quarter a year ago. Indeed, nearly one in ten investors are committed to investing in all alternatives.
A year ago, around a quarter of investors in the same study were investing in four or more asset classes. The report stated, “Participation in multiple alternative asset classes is now the norm for the majority of institutional investors, with alternatives portfolios becoming more and more diverse”.
Demand for transparency and better sourcing
Aside from looking to invest in a wider range of asset classes, investors are concerned about issues of transparency and sourcing. Institutional investors want fund managers to get their act together in terms of basic transparency – calls for clearer communication about the investment strategy and deeper performance data were among the most noted problems in the study.
In addition, the Preqin survey found a significant number of investors worried about current sourcing strategies. The limited supply is causing issues in finding the right targets, but also adding pressure on the pricing of the funds. In terms of private equity, 80% of respondents were happy with the as an asset class, yet 70% also felt pricing and valuation are currently problematic. Other alternatives showed similar results.
Pedro Antonio Arias of Almundi said, “These concerns are a reflection of the fee structure currently operated by most managers. If managers can collect fees from the capital committed rather than the capital invested, there is no incentive to invest quickly.”
Private equity appetite strong, hedge fund interest flailing
When it comes to diversifying the asset classes, private equity remains a key pick for institutional investors. The private equity sector was only beaten by real estate, which attracts a bit over 60% of the respondents. While hedge funds came in third with 51% investing in the asset class, they were also the asset class most investors said they’d stop investing in this year. Furthermore, hedge funds gained the lowest rating in terms of alignment of fund manager goals with those of the investors.
The positivity towards private equity has grown over the year. While over 80% of investors felt happy with the asset class this year, the number stood at 60% just a year ago. The positive mood is set to materialise in actions soon. Almost 80% plan to commit to private equity in the first quarter of the year and nearly 90% of respondents want to invest the same amount or more in private equity in 2018. One of the key challenges to ensure the mood stays positive is for fund managers to ensure the pricing meets the investor expectations.