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Outlook for the Alternative Assets Investment Market

Newsletter Aug.29,2022 07:45

Growth prospects for alternative assets
When it comes to investing, stocks and bonds tend to come to mind first. In recent years, however, many investors have turned their attention to another opportunity: alternative assets.

In fact, global alternative assets under management (AUM) are expected to grow by 62% between 2020 and 2025. In this article we explain what alternative assets are and which categories will see the biggest growth.

What is an alternative asset?
Alternative assets are investments that do not fall into traditional asset classes such as stocks, bonds and cash. It is divided into the following asset classes:

Private Equity: Refers to investing in companies that are not publicly traded or listed on a stock exchange. This can also include public companies acquired by investors or private equity funds.
Private Debt: Investing in a company in the form of debt rather than equity. Private debt is not typically financed by banks and is not traded or issued on the open market.
Hedge Funds: Primarily composed of unregulated funds that can invest in a wide range of asset classes and directions. These funds are designed to "hedge" risk and maximize profits no matter which direction the market moves due to a long (buy) or short (sell) position.

Real Estate: refers to the acquisition, financing and acquisition of ownership of real estate through funds, companies or private investment channels. This includes home, commercial and industrial properties at the initial opening, as well as properties sold between buyers and sellers thereafter. Infrastructure: Investments in services and facilities critical to socioeconomic development. This includes areas such as energy, logistics, telecommunications, transport, utilities and waste management.
Natural Resources: Investments in the development, improvement, or production of various natural resources. This includes resources such as agriculture, renewable energy, woodland, water and metals

Private equity will grow the fastest, and its funding will continue to rise at the fastest rate. Private equity’s share of total alternative assets under management is expected to rise from 41% in 2020 to 53% in 2025. Preqin predicts this will be attributed to strong performance and high asset liquidity, while 79% of investors surveyed plan to increase their allocation to private equity.

Private credit is also expected to show strong growth. Because private credit funds have a higher risk appetite than banks, such funds may be active in emerging technologies such as pharmaceuticals and telecommuting.

Likewise, investors may turn their attention to real estate, which is full of earning potential. Long-term rental assets typically offer stable cash flow and rents that grow as an inflation-indexed percentage, making them one of the asset classes that can hedge against inflation.

Opportunities in the alternative asset space With the exception of investments such as liquid alternatives such as ETFs, alternative assets are generally only available to institutional investors. However, recent regulatory reforms by the U.S. Securities and Exchange Commission (SEC) mean that private markets will be opened up to individual investors who meet certain criteria.

Alternative assets offer many unique opportunities, including portfolio diversification, low market correlation, and potential outperformance. In fact, the study found that private equity was the best-performing asset class in public pension portfolios based on median annualized returns from 2010 to 2020.

Investors appear to be waking up to the potential, according to Preqin's forecast. While stocks and bonds will likely remain at the heart of portfolios, alternative assets will undoubtedly help broaden investors' horizons.