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Alternative Investment Industry Poised to Continue Significant Growth

In the past decade, alternative investments have become more “mainstream,” as investors appear to have become more comfortable owning non-traditional assets. We believe that this class of investments, if used appropriately, can potentially provide the following benefits: (1) increases a portfolio’s diversification, (2)  better risk-adjusted returns than traditional assets and (3) can benefit the overall portfolio risk/return profile by producing returns that may exhibit low correlation with traditional assets.

Some industry observers see the increasing importance of alternative investments as a trend that will continue beyond 2020. In the article copied below, Institutional Investor magazine, citing new survey research from alternative investment industry data provider Prequin, notes that the alternative investment industry is expected to grow by 59 percent by 2023, reaching $14 trillion in assets. The article cites survey data indicating that the growth will be driven by investors’ need for yield, the strong track record of alternative assets and a declining number of publicly traded companies. The data gathered by the author also show that survey respondents would increase their allocations to Private Equity, Infrastructure and Private Debt by more than 60 percent. In addition, the data indicate that Real Assets are expected to be the fastest-growing group of assets over the next five years and are expected to represent 13 percent of alternative investments by 2023.

Report: Alternative Investment Industry Will Hit $14 Trillion By 2023

According to data tracker Preqin, the alternative investment industry’s growth will be driven by a desire for yield and a decreasing number of public companies in the equities market.

The alternative investment industry is expected to grow by 59 percent by 2023, reaching $14 trillion in assets in five years’ time, according to new research from alternative investment industry data provider Preqin. 

The industry managed $8.8 trillion as of the end of 2017, according to Preqin, which says growth will be driven by investors’ need for yield, alternative assets’ strong track record, and a declining number of publicly traded companies. The report, published online Friday, is based on surveys with 300 fund managers and more than 120 institutional investors completed by Preqin in June. 

The data show that investors plan to increase their allocations to three major categories in the next five years: 79 percent said they would increase their private equity allocation, 70 percent plan to boost allocations to infrastructure, and 62 percent plan to increase allocations to private debt. 

As such, private equity assets are expected to increase by 58 percent over the next five years, overtaking hedge funds as the largest alternative asset class, according to the report. The private debt market is expected to double in size, reaching $1.4 trillion in size by 2023, according to Preqin. 

What’s more, 93 percent of fund managers in the private debt industry say they expect their growth to be organic, rather than through acquisitions or roll-up strategies. In other words, increasing allocator interest will drive growth in the asset class. 

While so-called real assets represent a smaller portion of the alternative investment universe — according to Preqin, they account for 8 percent of total industry assets — they are expected to be the fastest-growing group of assets over the next five years. Real assets, driven by natural resources, are projected to represent 13 percent of alternative assets by 2023, reaching $1.8 trillion in size.

Much of that growth will be from family offices and sovereign wealth funds. Fund managers view family offices and sovereign wealth funds as more important sources of capital in 2023, according to the report. 

These funds are starting to believe they can run their own money, rather than outsourcing asset management. With that comes a push to bring alternative investing in-house.

“Since the global financial crisis, we have seen more family offices and sovereign wealth funds in the market globally,” said Michael Stirling, chief executive officer of Stirling Infrastructure, in the report. “They manage more capital, are more sophisticated and broadly have greater expertise in-house than was the case prior to the global financial crisis.”

Banks and defined benefit plans are expected by fund managers to be far less important sources of capital in the future, the report shows. 

There are expected to be more fund managers available for allocators to choose from in 2023. Preqin data show a projected 21 percent increase, bringing the total number of fund management firms to 34,000 in 2023. 


The opinions expressed in the reprinted article are those of the author, and do not purport to reflect the opinions or views of CPWM, LLC, its affiliates, or any of their respective employees. Full disclaimer found here.

Source: Institutional Investor, Alicia McElhaney