If you are an alternatives fund manager, forget the old world of America and Europe. The growth is in the new world of Asia and other developing markets. A new study by Preqin, the global investments research house, spells out the future for alternatives managers and their investors.
The study says the alternatives sector will be significantly larger than today, reaching US$14 trillion within four years. Mark O’Hare, Preqin’s chief executive, asks: “Could the forecast be too high? Possibly, but we believe there is significantly more upside risk than downside.” The study predicts:
- Assets under management in alternatives will be up 59 per cent, compared with the last such study in 2017, to US$14 trillion by 2023
- There will be at least 34,000 alternatives managers globally by 2023, which is up 21 per cent since 2018.
The drivers of the growth include: alternatives’ track record and “enduring ability; investors’ need for alpha; the difficulty of finding this in public markets; the decline in the number of listed stocks, as private capital is increasingly able to fund businesses; the growing opportunities in private debt as traditional lenders decline; and the big opportunity in emerging markets.
According to Ohare, there are four key reasons that suggest upside risk is more likely than downside risk. They are:
- Technology: (especially blockchain) which will facilitate private networks and help investors and fund managers transact and monitor their portfolios and reduce costs versus public markets.
- Control and ESG: investors increasingly want more control and influence over their investments, and the ability to add value; private capital provides this.
- Emerging markets: the Chinese venture capital industry already matches that of the US in size; further emerging markets growth will be a ‘double whammy’ of GDP growth + higher penetration of alternative assets, and
- Private individuals: the ‘elephant in the room’, as the mass affluent around the world would like to increase their investment in private capital if only the structures and vehicles (and regulation) permitted; technology will help.
Meanwhile, the annual global survey by management consulting firm EY says that investors are allocating more to private equity and real estate rather than hedge funds. The study, ‘2019 Global Alternative Fund Survey’, says talent continues to be the most sought-after resource as managers look to the future.
The study says: “Alternative asset managers continue to compete against each other as well as other industries to attract the best and brightest to their firms. Individuals with varying skill sets, particularly those familiar with rapidly evolving technology and data analysis, are in such demand that the battle is not yet won in merely employing the talent, but rather the development and retention of these individuals is an increasingly complex dynamic to address. Managers are embracing a younger, more diverse generation of talent which does not necessarily share the same expectations from their employer than previous generations. Balancing the right mix of compensation and non-compensation-related benefits has never been more critical to maintain a workforce of individuals who can share and someday take over the leadership reins of the organization. “
The study says that sourcing and managing data can also be a competitive advantage. The proliferation of data available to managers has created opportunities for those able to evaluate structured and unstructured data sets to identify unique investment ideas that are not readily apparent to other market participants.