In an unstable investment environment with wars and crises looming worldwide, contradictory inflation data as well as insecurity regarding interest rate development, alternative investments have evolved into a diversifying and stabilising element of institutional portfolios – and will continue to do so.
In the study “Asset and Wealth Management Revolution 2023: The new context”, experts from PwC state that alternative investments will remain the fastest-growing category in asset management over the next five years and will increase by a third to a volume of almost 24 trillion dollars by the end of 2027.
This trend is mirrored by the regular analysis of client investments by one of Europe’s largest fund service platforms and Super ManCo Universal Investment. Since 2011, Universal Investment group headquartered in Frankfurt and with locations in Luxembourg, Ireland and Poland, has been examining how its clients can best adjust to a changing macroeconomic and geopolitical environment.
At the end of 2023, roughly 103 billion euro on Universal Investment’s platform were invested in private equity, private debt and other unlisted investments, consisting of around 250 fund and securitisation structures. Over the last year, the alternative investments team has accompanied and structured more than 975 transactions.
Little momentum for bonds
Yields around zero per cent or even in negative territory caused losses for bond portfolios, particularly in 2022, which have so far only been partially offset. Funds with longer-dated bonds in particular have not yet fully recovered. The duration of the recovery depends on the duration of a bond index before the rise in yields. The longer the duration, the longer the portfolio will take to recover from the losses. However, the current yield on many bonds is attractive again at 2.5 to 4 percent in euro.
The equity allocation of institutional portfolios has increased slightly compared to the end of 2023. This reflects the outperformance of individual stocks or sectors. On the other hand, there have been corresponding purchases, particularly in IT stocks. Investors continue to focus on the development of artificial intelligence and its impact on the economy, motivating them to strengthen their positions accordingly.
Infrastructure investments
All areas of private markets remain of interest to institutional investors: equity structures, especially private equity, remain to be the most popular: 65 percent of alternative investments are invested here. Private debt investments account for 13 percent and securitisations for ten percent.
A particular area of interest to pension funds, insurance companies and other institutional players is the financing of infrastructure. When it comes to alternative investments, both equity and debt-structures are in demand. Whether it’s for the construction or modernisation of roads, airports, and bridges, or in the social sector for schools, pre-schools, day-cares and hospitals: Governments, companies and banks can no longer raise the necessary funds on their own. Private capital is welcome to fill the gap.
However, structuring an infrastructure investment requires in-depth market knowledge as well as the awareness of risks. As the projects are designed long term and often lack transparency, look-through reporting at fund and target investment level can help. In addition, secure transaction management with reliable processes must be guaranteed. In all these areas, fund professionals are increasingly relying on the support of experienced partners from established Super ManCos.
All through 2023, alternative investments provided solid support for the performance of institutional portfolios. Together with investments in equity, which saw near-record prices last year, hedge funds scored with a two-digit return year on year. Over three and five years, private equity investments performed strongly and over ten years, hedge funds and private equity boosted overall performances with around 13 percent respectively.
Martin Groos is a member of the management board at Universal Investment Luxembourg, a knowledge partner of Investment Officer.