Asset Owners Continue Pouring Money into Alternatives in 2023, Up 19%

They keep private equity and venture capital as their top category by size, even though these two alts are lagging on investment returns, per a study.

Capital inflows into alternative investment managers increased 19% in 2023, according to Alternatives Watch Research and Vidrio Financial’s annual 2024 Investor Compendium. The report found that institutional investors plugged $172 billion into alternatives in 2023, up more than 19% from the year before. In 2022, Vidrio saw $144 billion flow into alternative managers.

Vidrio examined over 1,000 strategies from more than 70 institutional investors across alternative asset classes, including private equity, credit, real estate, real assets, infrastructure and hedge funds.

Of the $172 billion of inflows into alternatives, $75.5 billion, or 44% was allocated to private equity and venture capital, compared with $61.6 billion or 43% the previous year. PE and VC continue as the largest segment of the alts inflows, even though investment returns ebbed amid higher interest rates.

Hedge funds saw a significant decrease in allocations, from $16.6 billion in 2022, or 11% of total commitments, to $13.3 billion in 2023, just 8%. Allocations to real estate increased from $27 billion year over year to $33.3 billion. Credit investments increased significantly from $27.1 billion to $32.4 billion. Finally, infrastructure allocations increased from $7.3 billion to $10.5 billion, and real assets increased from $4.9 billion to $6.6 billion year over year.

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“Despite a slowdown in allocations to private equity and venture capital in 2023, interest in alternative investments is still running at elevated levels,” said Mazen Jabban, Chairman and CEO of Vidrio Financial, in the report.

Institutional investors continue to favor alternatives to further diversify their portfolios. “Investors’ appetite will still favor private market opportunities versus liquid alternatives and hedge funds,” he added. He noted that private credit strategies have become very popular, “as allocators rush to get exposure to this up-and-coming asset class.”

Vidrio says that investor appetite will still favor private market opportunities vs liquid alternatives and hedge funds. Vidrio also expects private equity activity to increase in 2024, as recession fears subside, and interest rates could potentially be lowered.

In a March 2024 survey from Commonfund, roughly 45% of institutional investors surveyed said they planned to increase their allocations to private equity this year, 27% of respondents said they planned to increase allocations to private credit.