In the midst of this global slowdown and ongoing geopolitical uncertainty, the alternative assets … [+]
STRATA Trust Company
The coronavirus pandemic has led to an unprecedented slowdown in the global economy. The U.S. gross domestic product (GDP) fell by 33% on an annual basis in the second quarter, more than triple its previous worst quarter. The eurozone fared even worse: Its GDP contracted by 40% on an annual basis during the second quarter.
In the midst of this global slowdown and ongoing geopolitical uncertainty, the alternative assets industry remains healthy. Yield-hungry investors are continuing to pour capital into alternatives with assets under management now exceeding $10 trillion according to Preqin, the alternative assets industry’s foremost provider of financial data and analytics.
Digging into the Data
In a survey conducted last November by Preqin, the majority of alternative asset investors said they were satisfied with their portfolio’s performance last year. Nine out of 10 (87%) private equity (PE) investors said their investments met or exceeded their return expectations last year. About the same percentage (86%) of PE investors said they intend to commit at least the same amount of capital to PE this year as they did last year.
These percentages were similarly high among other alternative asset classes. Even in hedge funds, investor satisfaction rose from 45% in 2018 to 59% in 2019. Hedge fund performance improved from -2.00% in 2018 to 11.45% in 2019.
Across each alternative asset class, at least 77% of investors say they plan to maintain or increase their capital commitments over the next year while at least 81% say they plan to maintain or raise their allocations. While uncertainty and asset prices both remain high and global markets could be at an inflection point, investors appear to be maintaining their faith in alternative assets.
Following is a closer look at where things currently stand with several of the main alternative asset classes.
Private Equity: Attractive Returns and Outperformance
Investors poured $595 billion into private equity investments in 2019, making this the third year in a row that PE investments topped $500 billion. Top-quartile PE funds in 2015 and 2016 are delivering net IRRs of 23.0% and 25.9%, respectively. Private equity outperformed all other private capital funds in years 2007-2016 with a median net return of 14.9%.
One out of five (21%) PE investors responding to the Preqin survey said they expect their portfolios to perform even better over the next year. Among the key challenges PE will face in maintaining high returns will be rising asset valuations and prices, increased market competition for assets, the exit environment, the geopolitical landscape and ongoing stock market volatility.
In another positive sign, the number of PE funds in the market increased between January and July of this year. Survey respondents believe the following industries seem best poised for growth in the years to come: supply-chain, fintech 2.0, robotics, biotech, remote collaboration and workflow, education, and the application of AI and automation in traditional sectors.
Private Debt: High Levels of Satisfaction
Private debt investors responding to the Preqin survey recorded the highest level of satisfaction with their investments’ performance with only 11% saying they were dissatisfied. At the same time, just 13% said performance exceeded their expectations. This isn’t too surprising given that private debt returns have been among the lowest for private capital the past couple of years.
An increasing number of private debt funds are coming to market with a record high 486 funds now on the road, seeking $239 billion in aggregate capital. About four out of 10 (44%) private debt investors responding to the Preqin survey said they intend to invest more in the next year than they did in the last year — this is up from 32% at the end of 2018.
Most private debt investors (63%) expect their portfolios to perform about the same this year as they did last year, while 19% expect them to perform better and 18% expect them to perform worse. Asset valuations and competition for opportunities are the biggest private debt challenges identified by survey respondents.
Hedge Funds: Long-Term Outlook Leads to Some Dissatisfaction
Last year’s 11.45% return of hedge funds as measured by the Preqin All-Strategies Hedge Fund benchmark is one of the highest recent annual returns of this alternative asset class. But investors tend to take a long-term view of hedge fund performance so some remain dissatisfied. Four out of ten (40%) hedge fund investors responding to the Preqin survey said their portfolios didn’t meet their expectations.
Despite $97 billion in net hedge fund redemptions last year, hedge fund investors are optimistic about the future. Eight out of 10 investors (84%) expect returns this year to match or exceed last year’s returns. About a quarter of them (26%) plan to increase their hedge fund allocation over the long term and another 54% plan to maintain their current allocation. Stock market volatility and the uncertain geopolitical landscape are the biggest hedge fund challenges seen by investors.
Real Estate: Investors Assuming More Risk
Many real estate investors are moving up the risk-return spectrum by looking to higher risk strategies to boost future performance, paying especially close attention to emerging markets. In particular, they’re seeking to forestall future return compression by seeking out new markets and higher return strategies.
Nearly nine out of 10 (87%) real estate investors responding to the Preqin survey were satisfied with their returns last year. These investors are also fairly optimistic about returns this year: Two out of 10 (21%) believe their returns will improve in 2020 while approximately half believe returns will stay about the same.
Industrial units are expected to continue the trend of relative outperformance as the need for warehousing and distribution space grows with the shift to online retailing by many consumers.
Impact Investing: Shaping Recovery from Covid-19
A growing number of investors today are seeking to take advantage of impact investing opportunities that will help shape and accelerate the world’s recovery from the Covid-19 crisis, which has heightened the need for impact investing. Opportunities exist in such wide-ranging areas as healthcare, urban development, education, food and agriculture, energy, and the environment.
Even as the severity and urgency of certain social and environmental needs is intensifying due to the economic disruption, impact investors are using available capital as a new pathway toward problem solving while taking on a meaningful role in the global economic recovery. Deploying capital effectively in the current climate will require both innovation and efficiency by impact investors.
A Unique Opportunity for Investors
Alternative assets may present a unique opportunity for self-directed IRA investors throughout the rest of this year and beyond. Please contact us at [email protected] if you have more questions about investing in alternative assets as part of your retirement portfolio.
The information provided in this article is educational content and not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
