Asset AllocationNovember 1, 2023

Tepid Turnaround Seen for Alts, Once Investors’ Darlings

AUM growth decelerates and fundraising softens, Preqin reports.

Reported by Larry Light

Alternative investments hit pause this year, after a spell of pell-mell investment inflows from institutional investors and other big players in search of higher returns than available from equities and bonds. Alt fundraising has flagged in 2023, and allocators such as the Maryland State Pension and Retirement System have scaled back commitments to private equity, long the kingpin of alts.

But there’s a muted recovery in the wings for alts, according to an analysis by research firm Preqin. Alts should pick up over the next five years, just not at the rate they enjoyed up to 2022, when the Federal Reserve started to hike interest rates, inflation mounted and recession fears took hold.

Globally, alternative assets under management are expected to climb to $24.5 trillion in 2028, from a projected $16.3 trillion this year, according to Preqin, which specializes in alternative investments. That represents an annual growth rate of 8.4%, slower than the 12.3% yearly pace from 2016 to 2022.

Private equity, for instance, faces more sluggish fundraising than in the past, down a forecasted 9.2% this year and 10.4% in 2024 in North America, which dominates the PE field, per Preqin. Up ahead, though, an estimated $2 trillion in spare cash should allow a modest pickup once current economic anxieties subside, in the firm’s view.

Another problem area is venture capital, hard hit by higher interest rates, courtesy of the Fed and other central banks. VC funds’ distributions to investors have slowed, and less capital has flowed into them, a vicious circle. The sector’s eventual recovery will depend on early-stage VC funds, which stand to grow the best as fledgling companies gain their footing, in Preqin’s estimation.

In the next few years, hedge funds face an even more lethargic growth rate. Before the 2022 slump, when the stock market was roaring, many failed to keep up with the S&P 500’s returns, which led to investor discontent. The space’s one-time double-digit annual AUM growth should be a trickle (3.6% per year on average) from now through 2028, Preqin projected.

High interest rates similarly have bedeviled commercial real estate, which suffers under the added burden of the office market’s high vacancies as a result of work-from-home-loving employees. Only near 2028 will the property segment begin to “normalize,” Preqin declared—a long time to wait.

On the positive side, private debt has a “bright” future, Preqin stated: Commercial banks have pulled back on loans, a vacuum that private debt funds have been happy to fill. Recent indications, however, are that banks are getting back into the lending game, so this could blunt the private credit advantage going forward.