What is the future of alternative investments and how will allocations continue to be diversified by leading pensions, endowments, family offices, sovereign wealth funds, and other institutional investors? Nick Bourne attends the Preqin: Future of Alternatives event and captures a few takeaways in our latest blog.
By: Nick Bourne, Commercial Director, EMEA
Alternative investments are quickly outperforming traditional assets offering a much-needed diversification tool for leading global allocators. According to recent insights from Opalesque and HFR, hedge fund capital surged to $4.46 trillion, marking an increase of $148 billion over the prior quarter as investors weigh potential outcomes of the US elections and geopolitical risk.
Vidrio also observes continued growth in the private credit space. The sector is already expected to reach over $2.6 trillion globally by 2029. With these forces taking shape across alternatives, Preqin's event: The Future of Alternatives was particularly timely.
Below I share my insights and takeaways from the panels and networking conversations. I hope you enjoy this recap.
A look at the future of alternative investments
Cameron Joyce, SVP, Head of Private Equity, is currently part of Preqin’s Research team based in London and opened this event. They predict that total allocations to alternatives will hit $30trn by the end of 2029 with a trend growth of 9.7% year over year. For most allocators, there are 4 pivotal “D’s” shaping portfolio allocations today.
They are:
a. Demographics – consisting of aging demographics, a pension landscape that is changing, and new entrants (including retail flows) to private markets.
b. Decarbonization –there will be vastly increased capital allocated to renewable energy including infrastructure and storage and a growth of carbon emissions in trading markets.
c. Deglobalization – trade barriers are rising. Multi-polar spheres of influence are emerging.
d. Digitalization – opportunities for new productivity gains are beginning to take shape and an investment explosion in IT hardware is needed to support AI development.
Alternative platform technology is broadening the investor base and appetite for alternatives. Preqin believes that more flows will continue to grow from family offices, ultra-high net worth investors (UHNW), and mass affluent retail investors.
Private equity and venture capital are being favored by UHNW investors while family offices prefer real estate. Fundraising will fall in private equity and private debt as most endowments are already overallocated to these sectors. Despite the recent hedge fund growth shown from the HFR reports (see above), Preqin forecasts that hedge funds will shrink in allocations from 27% to 20%, while private equity will grow to 41% of alternatives by 2029.
Fundraisings Future:
Once Cameron had set the scene for alternatives the event opened its first panel discussion entitled “Future of Fundraising”. This panel provided insights from Cara Griffiths, Managing Director, Blue Owl Capital, Tom Sargeant, Partner, Bain Capital, and Michael Sidgmore, Co-Founder & Partner, Broadhaven Ventures and Founder, Alt Goes Mainstream.
A theme that we’re hearing more chatter on is how LPs are looking for consistent returns from a small and trusted group of investment managers. Investors are becoming a lot more sophisticated (and selective) as their alternative strategies become more complex. Many allocators have either slowed their rate of investment or have attached strings on the investment to minimize risks and gain greater transparency into alternative funds holdings. A notable example shared by the panel was the desire of sovereign wealth funds to have investors present in their home countries, demonstrating a strong commitment to the GP-LP partnership. This strategy aligns perfectly with Vidrio's vision, as we've recently established our own office in the GCC region, empowering asset owners with profound insights into the cutting-edge technology and services we provide today.
Wealth investors are more concerned with liquidity and tax. The presence of multiple intermediaries often complicates the investment process, as these intermediaries are not the decision-makers, leading to extended timelines. In this context, significant inflows from UHNW investors are gravitating toward well-established, larger-brand general partners with robust networks and substantial resources. The panel touched on co-investing as a prominent theme but investors need to be aware that these investments comes with risks. They believe investors will want traditional fund structures again as there are simply not enough co-investment deals to go around.
While ESG was discussed, many concurred that its role as an investment driver has diminished, emphasizing that the core mission of alternative funds is to generate returns, not to engage in political discourse. Alternative allocators must remain adaptable, as regulatory changes and government policy can be unpredictable, and strategies that are effective today may not be viable tomorrow.
Overall, the US is still the largest and deepest market for alternative investors although gains in Asia over the last 12 months are making those in the institutional space take notice. Earlier this year, South Korea’s National Pension Service (NPS), adjusted its approach to alternative investments to better respond to investment opportunities.
Vidrio has also followed the news where Singapore’s sovereign wealth fund (GIC) is concerned. Eric Wilmes, President of the Americas and Head of Private Equity, GIC, stated that they experiment with alternative investments by taking a rifle shot (experiment) to a new region or strategy, and upon verifying a positive signal they’ll follow that up with a deeper level approach and greater willingness to innovate. More on GIC’s approach can be found at Institutional Investor here.
Regional trends are patchy according to this panel, and although hiring is ramping up in Asia and Japan, if you start looking at the Middle East you observe that some SWFs are pausing investments while others are seeking to launch joint ventures with governments. LPs are concerned about performance degradation as funds get larger. Monitoring investment performance and valuations will become even more crucial to these allocators. Vidrio helps our clients do this. See our coverage below:
Fireside Chat:
In the next session, Christoph Knaack, CEO, Preqin sat down with Wei Li (Managing Director, Global Chief Investment Strategist, BlackRock) to discuss alternatives within a geopolitical and macroeconomic context.
Wei Li believes that US debt will rise from 123% of GDP to between 150-200% of GDP by 2040 irrespective of the outcome of the US Presidential election. Economic factors had been driving geopolitical risks, but now it’s flipped, and the world is becoming more uncertain. Government bonds are no longer an effective hedge, yet private credit is still well-positioned and could take over direct lending from the banking system. Wei Lei believes that allocators, such as pensions, should be allocating 30-35% of their portfolio to private credit, well above the current 10% level.
She highlighted her top 5 macro forces affecting her investment thinking:
-
Aging populations - demographic decline where populations may be shrinking and younger workers aren't in enough supply to support the pension payouts for the future.
-
Decarbonization - the energy transition to a greener economy means huge amounts of capital will need to be invested to sustainable energy goals, (wind, solar, etc). Thinking needs to change around older energy forms (coal, oil) and what those allocations might become in the future.
-
Geopolitical fragmentation - how will uncertainty in regions like the Middle East, Russia and Asia, impact future investments? Allocators are actively looking into these risks and relying on technology platforms to help model areas of concern.
-
Artificial Intelligence - how will AI figure into allocation strategies as well as generate operation efficiencies for the future, (separately Vidrio ran it's own survey report on the future of AI for institutional investors. You can download that here.)
-
Financing – shift to private credit
Asset Allocations:
To kick off the Rethinking of Asset Allocation with Dr Matthias Feiler – Head of Asset Allocation, LGT Capital Partners, Roberto Marsella – Head of Private Assets, Generali Investments, Holly Murniek – Senior Director Investments, WTW, Rob Petty, CEO Asia, Fiera Capital, a quick poll was taken on where alternative asset allocations would be in 5 years. The results were as follows:
Holly’s perspective focused on long-term investors which included pension funds (DB and DC), endowments, family offices, and wealth foundations. Most of these allocators are looking for better risk/return dynamics and the alpha is still coming from the illiquidity premium. The secret lies in greater diversification while adopting a total portfolio approach and having fluid thinking when evaluating strategic themes like healthcare and pharma. By strategically leveraging secondaries investors can access private markets even if their past exposure has been minimal. The best part is that capital is deployed at a much quicker rate.
Roberto specializes in working with sovereign wealth funds, family offices, pensions, and insurance companies. He stated that while the first two groups enjoy the luxury of not needing immediate cash flow, pensions and insurance entities prioritize liquidity. This makes private credit an ideal choice for their investment strategies. Secondaries are important as they fulfill a need, but risks exist as the NAV is not a precise number. Private debt valuations are more precise and therefore discount rates can be more realistically applied.
Rob stated that private credit is a key asset class due to its shorter duration liquidity and good IRRs. Private markets play well in the Organization for Economic Cooperation and Development (OECD), countries due to their good governance and rule of law. He advised that technology continues to assist institutional investors in their search for alpha by building diversified portfolios and further expanding the “retailization” of the alternatives sector. This is an opinion shared by many clients of Vidrio who have come from legacy systems that fall into one or more of the categories below:
(To learn more about the most frequently voiced challenges of these platform types, be sure to download our e-book here.)
Finally, from Dr. Matthias Feller’s perspective, liquid alternatives have a role to play in investor portfolios. Private Equity gives exposure to the real economy while liquid alternatives are market-neutral and can provide liquidity to meet capital calls and other obligations. Dr. Feller is concerned that Europe has been talked down when private markets in Europe are more attractive and better performing than public markets. In his mind, private equity is the financial engine that pulls everything else along.
At Vidrio, the Future of Alternatives transcends being just an event—it's a commitment to revolutionizing how Vidrio Financial delivers unparalleled transparency, robust data management, and cutting-edge reporting for institutional investors. The insights shared during this critical event echo global investor sentiment, as they seek to reallocate portfolios, manage risks, enhance liquidity, and adopt a comprehensive portfolio strategy.