The unstoppable rise of alternative assets in asset allocations

The world’s largest 100 alternative asset managers saw assets under management increase by 10% in 2016, rising to $4.0 trillion, according to the 2017 edition of Willis Towers Watson (WTW)’s Global Alternatives Survey.

The survey captures long-term institutional investment trends by seven main investor groups across 10 alternative asset classes. It showed that of the top 100 alternative investment managers, real estate managers have the largest share.

• That share equates to 35% of assets under management (AuM) and over $1.4 trillion)
• It is followed by private equity fund managers (18% and $695bn)
• Hedge funds (17% and $675bn)
• Private equity funds of funds (PEFoFs, 12% and $492bn)
• Illiquid credit (9% and $360bn).
• Funds of hedge funds (FoHFs, 6% and $228bn)
• Infrastructure (4% and $161bn)
• Commodities (1%)

Illiquid credit sees largest increase

In terms of the growth in asset classes among the top 100 asset managers, illiquid credit saw the largest percentage increase over the 12-month period, with AuM rising from $178bn to $360bn.

Conversely, assets allocated to direct hedge fund strategies among the top 100 asset managers fell over the period, from $755bn to $675bn.

The attractions of alternative assets are clear, says Laurence Fhima, head of business development, alternative assets funds at Societe Generale Securities Services. In this extraordinary low rate era, investors are seeking yield and ways to preserve their capital.

Unorthodoxy required

This means looking at unorthodox ways, she notes. Private equity and real estate are investment opportunities that provide a way to deliver a concrete financial return and preserve capital both of those in a yield-starved market, she comments.

“We see a clear trend towards non-listed asset (private equity, real estate and loans) as an asset class, and this is reinforced by independent industry data,” she says. In addition to the WTW survey, figures from data provider Preqin testify to the volume of funds available.

The most recent such figures featured in a news story here. That told how the venture capital-backed deal market has recorded its largest ever quarter, as 2,062 deals worth a combined US$47bn were announced in the second quarter.

Laurence Fhima, courtesy of SGSS

VC trend confirmed

Another recent report from Invest Europe confirms the VC trend. Preqin expects its figures to rise by around 5% as more data become available. The second quarter of 2017 already surpasses the previous record of $43bn in VC-backed deals recorded in Q3 2015.

Activity in the quarter was driven by record levels of dealmaking in Asia. The region saw deals worth a total $22bn. This is almost half the global total. This is the fourth quarter since the start of 2015 in which Asia has surpassed North America as the most prominent region.

This trend does not come without its specific issues. There is a flip side to the boom, says Laurence Fhima. A lasting effect of the 2008 global financial has been the requirement to provide more detailed information to investors and to regulators, she says.

Regulation begets demands

Each regulation requires a different set of secure and standardised reports. Each regulation needs to be analysed intensely to establish the new demands. A process then needs to be devised to meet those requirements.

For financial intermediaries the main challenge is fulfilling third-party transparency demands. An awareness of the rules and an understanding of the perspective of an investment are essential components of a healthy investment process.

Ari Rastegar is founder and owner of Rastegar Equity Partners, a Dallas-based specialist real estate investor. He contributes regularly to the D Magazine brand range in Texas. In spring this year he joined the commentators offering explanation and opinion.

PERE has clear attractions

At a time of virtually zero returns on cash and near-cash investments, private equity real estate has clear attractions, he wrote. If all else goes wrong, property will exist long after fiat paper money and other traditional investments have imploded or vanished.

Anyone for Lehman Brothers, The Royal Bank of Scotland, Lloyds Bank or Cypriot bank deposits? he adds, by way of illustration.

“Investors are seeking yield and ways to preserve their capital,” he added. Real estate provides both in a very yield-starved market. As more investors become aware they can access these types of investments, demand increases.

Luba Nikulina, courtesy of WTW

“In an era when yield is often the return OF money rather than the return ON money, there would seem to be every chance that investment in private equity real estate will continue strongly,” he argues.

Back with the survey

Luba Nikulina, global head of manager research at Willis Towers Watson, comments: “As capital supply and competition have increased in some segments of the illiquid credit universe, yields are not always offering sufficient compensation for illiquidity and risk.”

“At the same time, we have seen some withdrawal of capital from hedge funds in the face of high fees, skewed alignment of interests and performance headwinds.

“It appears that the growing groundswell of negative sentiment that has arisen due to the aforementioned issues is now showing up in the decisions of asset allocators.

Hedge fund industry needs to change

“We have been surprised it has taken this long to observe the trend turn, however this is aligned with our long-held view that the hedge fund industry needs to change, with those willing to offer greater transparency and display value for money likely to prosper.”

WTW says that data for the total alternative investment universe show that overall alternative assets under management now stand at just under $6.5 trillion, across 562 entries.

North America continues to be the largest destination for alternative asset manager allocations (54%). Overall, 33% of alternative assets are invested in Europe and 8% in Asia Pacific, with 6% invested in the rest of the world.

Pension position

The research also highlights that pension fund assets represent a third (33%) of the total assets. This is followed by wealth managers (15%), sovereign wealth funds (5%), endowments & foundations (2%), banks (2%) and funds of funds (2%).

Notably, insurance companies’ proportion among the top 100 alternative asset managers grew from 10% to 12% of total manager assets.

Pension fund assets managed by the top 100 alternative asset managers now stand at $1.6 trillion, up 9% compared to last year’s study. This figure represents 51% of their total AuM. Illiquid credit allocations for this group doubled to 8% over the 12 months.

Courtesy of WTW

Real estate managers top for pensions

Real estate managers continue to have the largest share of pension fund assets with 41%. This is followed by private equity FoFs (18%), hedge funds (12%), infrastructure (8%), illiquid credit (8%), private equity (7%) and FoHFs (5%).

Bridgewater Associates is the largest manager in terms of overall assets under management, with over $116bn invested in direct hedge funds. TH Real Estate – an affiliate of Nuveen, the investment management arm of TIAA – is the largest real estate manager globally.

It oversees more than $105bn in assets. Blackstone continues to look after the highest volume of private equity and FoHF assets at just over $100bn and $71bn respectively. Prudential Private Placement Investors is the most significant illiquid credit manager. It has nearly $81bn AuM.

Courtesy of WTW