Institutional investors are turning into alternative assets. The worldwide trend of opting for investments such as property, infrastructure, private equity and hedge funds has been gathering pace since last year. The shift to alternative assets has also driven up valuations of these illiquid assets – concern over returns is starting to mount up.
Alternative assets under management increasing
The annual Willis Towers Watson/FTfm Global Alternatives Survey shows how the 100 largest alternative investment groups have increased total assets under management to over $4 trillion. According to the Financial Times report, this is up by a tenth in terms of the previous year. During 2015, the increase stood at 3%.
The newspaper interviewed some of the top alternative asset groups and the message was loud and clear: alternatives are offering better strategies at the moment. Anton Pil, global co-hear of alternatives at JPMorgan Asset Management, told the Financial Times, “The wide dispersion in manager returns is a characteristic of all alternative strategies, This makes manager selection critical for success”.
While property remains the hottest alternative asset class amongst investors, private equity has also performed well. According to Preqin, the sector attracted $325 billion worth of investments last year. This is an 18.5% increase from the investments in 2015.
The top three of alternative asset management groups is Blackstone, JPMorgan Chase, and Goldman Sachs. Both Blackstone and JPMorgan Chase increased their alternative asset allocations by more than 8% in 2016.
What about the returns?
As more investment flows into alternative asset, the valuations increase and problems start to rise on top of the return prospects. Private equity has offered an interesting alternative and opportunity to diversify. But are the returns even there?
The sector has not been without its problems. Just recently, former private equity fund was reported to be negotiating with investors over a takeover of the failing fund. The fund used to be valued at $2 billion but right now, the Wall Street Journal is reporting the value to be close to zero. Furthermore, the latest Global Private Equity Barometer shows private equity returns have dropped.
One of the issues is the abundance of dry powder. The global non-allocated capital is currently at $1.5 trillion – finding a suitable deal has become increasingly difficult. Luba Nikulina, global head of manager research at Willis Tower Watson, told the Financial Times, “There are too many deals that have been priced and leveraged to withstand a downturn”.
However, mainstream asset classes have not been creating celebration-worthy returns either. Therefore, the alternative assets seem the most luring. Investment in assets like private equity and hedge funds also have plenty of exciting opportunities on the horizon, not least with the rise of the fintech sector.
Furthermore, while the loss of $2 billion might sound horrible, it’s extremely rare. According to research firm Cambridge Associates LLC, only seven private equity firms with funds of over $1 billion have lost money for their investors. When returns are hard to come by, private equity continues to offer an investment opportunity with relative stability.