Research for Preqin’s latest Investor Outlook has found that four out of five institutional investors invest in at least one alternative asset class.
Private equity, hedge funds and real estate are the most targeted alternative asset classes, with over half of investors having an allocation to each of them in their portfolios. Although the benefits vary significantly between asset classes, common reasons cited by investors for holding allocations to alternative assets include diversification, high returns, reliable income streams and inflation hedging characteristics.
Investment in almost all asset classes is likely to increase over the coming year. In particular, 42 per cent of private equity investors, 38 per cent of private debt investors, and 36 per cent of infrastructure investors plan to invest more capital in the next 12 months than they have in the previous year. A third of hedge fund investors are looking to invest less capital over the coming year compared to the last 12 months, compared to 19 per cent that are looking to invest more.
The vast majority of investors have a positive or neutral view of each asset class. For investors in private equity and real estate, this stands at 95 per cent and 94 per cent respectively. Twenty percent of investors in hedge funds have a negative perception of the asset class.
Growth in investment also looks set to continue in the longer term, as the largest proportion of investors plan to increase their allocations to each asset class. In particular, 51 per cent of private equity investors, and 44 per cent of infrastructure investors are aiming to allocate more capital to these asset classes.
Over 60 per cent of investors in real estate, infrastructure and private debt target returns of at least 8 per cent annually. Just under 60 per cent of private equity investors seek returns of at least 14 per cent. A significant 15 per cent of private equity investors target annualized returns of 20 per cent or more.
The majority of investors in all asset classes believe that their interests align with those of fund managers. Private debt and real estate have the highest level of investor satisfaction, with 83 per cent and 80 per cent of investors respectively stating that their interests are represented by fund managers.
The largest proportion of investors in all asset classes believes that fund terms are changing in their favour. Forty-seven percent of hedge fund investors, and 44 per cent of private equity investors, feel that terms are becoming more favourable for investors.
“Institutional investors allocate to alternative assets to diversify their portfolios and to achieve a broad range of other objectives,” says Mark O’Hare (pictured), CEO, Preqin. “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.
“It is clear that the institutional community remains confident in the ability of alternative assets to help them meet their return objectives. The majority feel returns are meeting or exceeding expectations and, as a result, a much larger proportion of investors plan to increase their exposure to alternatives than plan to reduce it. There remains huge scope for the alternative assets industry to grow in future years, both as investors build up existing allocations, and as they also further diversify their portfolios to include a wider range of asset classes.”
