What Asset Classes Will Allocators Choose as They Up Their Alts Ownership?

Alternative assets are the most sought-after investments among institutional investors. But to allocators, not all alts are created equal: private equity, private debt and infrastructure are the favorites, according to a survey of asset owners by research firm Preqin.

For institutions, the average allocation to alts overall grew to 20% of their portfolios last year, from 18.4% in 2022, Preqin reported. And the interest levels vary by type of investor. Among the sectors that allocators seek in their alt investments, there is a wide disparity.

Around 55% of these investors reported plans to boost their private debt “over the longer term” (which is undefined but presumably more than just a few years), the Preqin survey of 4,255 institutions showed. For private equity, about 48% want more in the future; for infrastructure, approximately 51% will increase their holdings. The laggard: hedge funds, at 20%.

While Preqin did not offer an analysis of why PE is among the most favored, history may provide a guide. The asset class’ appeal likely has stayed strong because, during this century, it has performed very well, up 11% annually versus 6.2% for public stocks.

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PE’s enduring popularity comes despite paltry returns in 2023—of just 0.8%, a CAIA report indicated—amid a pullback in initial public offerings and mergers and acquisitions activity, meaning PE funds had fewer opportunities to cash out.

Private debt has come to the fore now that interest rates have catapulted from near-zero over the last two years, owing to Federal Reserve hikes to combat resurgent inflation. The key enticement is the high returns it delivers—11.5%, by Pitchbook’s reckoning. That is almost triple what the benchmark 10-year Treasury yields.

For infrastructure, which is getting a lift in the U.S., from an outpouring of federal spending, the future also seems to be on its side. Its 2023 returns were in the low teens, another Preqin report found.

And hedge funds? Investors have grumbled in recent years about their single-digit returns. The performance did improve last year, rising to 7.5%, up from 1.1% the year before, Hedge Fund Research data showed.

The Preqin report listed several factors to explain the attraction of alts overall: The hunt for higher risk-adjusted returns, diversification benefits, an inflation hedge and income generation.

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Tags: Alternatives, CAIA, Hedge Fund Research, Hedge Funds, Infrastructure, PitchBook, Preqin, Private Debt, Private Equity

Stephan Rupert

Stephan Rupert has been appointed CIO of Canada Growth Fund Investment Management, a spokesperson for the firm told CIO. Rupert will be the inaugural CIO of CGFIM, which began making its first investments late last year.

CGFIM is a subsidiary of Canadian pension fund PSP Investments that manages the Canada Growth Fund, a C$15 billion ($10.94 billion) initiative to invest in Canadian businesses and technologies to accelerate the country’s path to net-zero.

The Canada Growth Fund was incorporated in December 2022 and made its first investment in October 2023, investing $90 million in Calgary-based geothermal energy company Eavor Technologies. In March, the fund made a C$50 million commitment to energy transition investment manager Idealist Capital.

In his role as CIO, Rupert will lead the fund’s portfolio construction strategy and investment execution activities, Rupert said in a post on LinkedIn. CGFIM has committed C$1.34 billion in investments so far, according to Rupert.

CGFIM focuses on investing in three key areas, projects that reduce emissions across the Canadian economy, including carbon capture storage and biofuels; clean technology companies; and low-carbon supply chains.

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Rupert has worked at PSP Investments for 11 years, most recently as a managing director, head of Americas, infrastructure investments at the fund. He was previously vice president of corporate development at RailAmerica Inc. and a manager, mergers and acquisitions, at CN Rail.

Rupert has a bachelor’s degree in civil engineering and a MBA in finance from McGill University. Rupert is also a CFA charterholder.