Evening Brief – 09.05.23
Alts: Down but Not Out
Despite an expected surge in allocations to alternative investments such as hedge funds, private equity, private credit and real estate, fundraising slowed dramatically in the first half of 2023, according to a survey from Preqin.
Alternative investment funds raised $740 billion since the beginning of the year, a 27% decrease from $1.02 trillion in the same period last year, according to the alternative assets data provider’s Investor Outlook: Alternative Assets, H2 2023.
According to a 2022 Preqin report, the sector was predicted to double in size between 2021 and 2026, with assets under management reaching $26 trillion. Alternative funds, however, raised $1.5 trillion in 2022.
In the survey of 178 top institutional investors, more than two-thirds said their venture capital portfolio was overvalued. Three-quarters indicated they planned to commit less than $50 million to VC funds in the next 12 months, a troubling gauge for VCs following a difficult fundraising year.
The findings indicate that investors remain wary of venture capital as an asset class, notwithstanding a drop in early-stage company valuations over the last year. Funding statistics have dropped drastically from blowout levels in 2021 and 2022, as rising interest rates ended a decade of cheap finance powering the sector.
Volatility, geopolitics, and high interest rates have been cited as reasons for the cooling interest in the alternatives sector during the last year.
Cameron Joyce, Preqin’s head of private equity, said the numbers showed investors are still striking a “cautious, tone” but there “may be some light at the end of the tunnel” as investors indicated an increase in overall investment in private asset classes.
Private asset allocations are expected to grow more broadly, with only 5% of investors surveyed wanting to sell down their private capital allocations in the next 12 months, and more than a quarter planning to raise allocations.
Private equity is the most popular asset class, with nearly two-thirds of investors allocating to it. Despite a more negative return forecast in the short term, more cash is projected to flow into private equity over the next 12 months.
Infrastructure is expected to be the second-most popular asset class in the next 12 months, with 41% planning to allocate more capital. The US market is expected to benefit from asset flows, with a year-on-year increase in investors recognizing opportunities in the region, from 60% in 2022 to 70% in 2023.
Private debt has exceeded investor expectations the most, with 90% stating that the asset class met or exceeded expectations in the previous year. This trend is projected to continue, with respondents most confident in private debt’s sustained great performance compared with all other asset classes.
Meanwhile, 81% of investors say the real estate cycle is either beginning to decline or nearing a bottom, but that there will be short-term distress. Almost half of respondents (47%) expect their real estate portfolio’s performance would deteriorate in the following year. Since last year, the proportion of respondents polled who intend to reduce their allocation to the asset class has more than doubled to 16%.