Although alternative assets remain a crucial component of many portfolios, investors are finding it harder to identify attractive investment opportunities compared to a year ago, according to Preqin’s survey of over 490 institutional investors.
With a record-high 2,798 private capital funds in market, and 13,725 hedge funds open for investment, choosing the right fund is challenging; 57 per cent and 54 per cent of real estate and infrastructure investors respectively are finding it harder to find attractive opportunities.
At the same time, among private equity and hedge fund investors 47 per cent and 46 per cent respectively stated the same.
Although private capital investors generally stated that they felt the balance of power with their fund manager was shifting towards them, there remain some aspects of the fund selection and marketing process which they view unfavourably.
For instance, fund terms remain a key issue across the industry; at least 80 per cent of investors across all asset classes stated that they had previously decided not to invest in a fund before due to the proposed terms, while more than a quarter in each asset class said they frequently did so.
Investors also felt that firms must work harder when promoting their funds; in excess of a third of investors across the alternatives spectrum commonly find that fund marketing documents do not meet their needs.
Almost 10 per cent of investors in real estate, hedge funds and natural resources stated that fund marketing documents always fail to meet their needs.
Seventy-nine per cent of institutional investors surveyed by Preqin participate in at least one alternative asset class, while 47 per cent invest in at least three. Larger investors are more likely to invest in alternatives; 88 per cent of those managing at least USD1 billion in assets participate in the industry.
For the first time ever, more investors intend to reduce (33 per cent), than increase (17 per cent), their allocation to hedge funds, in the long term. Private debt and private equity, however, can expect growth in with 67 per cent and 56 per cent of investors planning to increase their allocation to the asset classes respectively.
Nearly a third of hedge fund investors (29 per cent) have target allocations of 20 per cent or more of their AUM, the highest proportion of any alternative asset class. Conversely, nearly half of infrastructure investors surveyed (49 per cent) are targeting an allocation of less than 5 per cent of their total AUM.
More than two-thirds (71 per cent) of investors hold a generally positive opinion of the private equity industry, the highest proportion of any asset class, followed by private debt (61 per cent). While a quarter of investors hold a negative opinion of natural resources, nearly half (46 per cent) are unhappy with hedge funds.
Only 11 per cent of investors felt that their investments in private equity, infrastructure or real estate failed to meet expectations. Moreover, over a third (36 per cent) of investors in real estate felt their performance objectives were exceeded, the highest proportion of any asset class.
“Institutional investors remain committed to alternative assets and, in most cases, far more investors expect to grow their allocations to these asset classes than intend to reduce them,” says Mark O’Hare, chief executive, Preqin. “However, it is undoubtedly a challenging time for investors, with an increasingly congested market making it difficult to select the right investment manager or vehicle, while fund managers face a battle in standing out from the crowd and attracting fresh investor capital.
“Investors pinpointed fund manager marketing documents and proposed fund terms as particular areas for concern; these issues seem to be present across all asset classes, and serve to illustrate the challenges investors face in committing to vehicles. Although more investors believe that the dynamic is shifting in their favour than against them, managers must ensure that they maintain open and effective communication during the fundraising process.”