Economic insecurities on a broad scale are increasingly impacting the decision making of institutional investors. With continuously high volatilities in equities and, as an effect of rising interest rates, even in the bond markets, they look at illiquid assets, or alternative investments that can offer solid cash flows and long-term returns.
At Universal Investment, we have been analysing the changing investment behaviour of clients on our platform since late 2011. The most recent data shows that alternative investments have become a solid anchor in portfolios of pension schemes, company pension funds or insurance companies. The insights gained are a valuable component of strategy discussions and support comprehensive market assessment - more important than ever in an uncertain environment as at present.
High demand for equity structures
While fund managers exercised a certain restraint when it comes to the traditional investment forms of bonds and equities, they have further upped their exposure to equity and debt capital structures as well as to securitisations (bearer and participation bonds) and hedge-funds. Based on the latest figures as of 30 June, alternative investments accounted for almost 17 percent of total fund volumes. New fund launches are just as much in demand as direct investments.
Equity structures have grown particularly. Investments in private equity, infrastructure or private equity real estate have increased by ten percent since December 2021. They account for 63.6 percent of all alternative investments on our platform.
Debt structures are catching up
Besides equity capital structures, private financing of companies, ships, real estate and infrastructure by private debt is becoming increasingly prominent. At the end of the first half year, they made up 15 percent of all alternative investments. Persistently low interest rates have strongly reduced earnings opportunities of commercial banks in their traditional standard business area of lending. In addition, regulatory requirements have been increased in this field. The resulting gap is being filled by institutional investors in search of yield.
Performance strengthened by private equity
The average performance of institutional investments on the Universal Investment platform was at -1.29 percent for the past year since July 2021. At the end of March 2022, the figure was still plus 4.8 percent. Private equity investments recorded a performance of 22 percent over the period of one year and were thus able to offset the drop in other asset classes, at least partially. Over a ten-year period, however, the portfolios still returned an overall solid 4.51 percent, private equity contributing with a strong performance of 14.7 percent in this period.
Promising outlook for multi-faceted asset class
The environment remains to be challenging for investment professionals who navigate their client’s assets through troubled waters. It will be interesting to see how investor behaviour changes when assets in fixed income start to deliver profitable returns again. It is possible that the alternative investment boom will become a little less intense. But as long as the assets continue to deliver an attractive return, there is no doubt that the diversity this multicoloured asset class brings to a portfolio will continue to make it attractive. Especially as future capital requirements for companies and institutions can be expected to increase rather than to fall.
Growing alternative investments
Dr Sofia Harrschar is country head Luxembourg at Universal Investment, a knowledge partner of Investment Officer Luxembourg.
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