Demand for private capital, in particular from major retail investors, continues to show resilience despite a challenging economic outlook.
Total global assets under management expected to almost double to 18.3 trillion dollars by the end of 2027, from 9.3 trillion dollars at the end of 2021, according to Preqin data. An extrapolation of Preqin’s global projection to Luxembourg suggests its alternative investment market could add more than 1000 billion euro in private capital during the coming years.
Venture capital is set to grow to over four trillion dollars in global AUM, while North America will drive the largest share of global asset flows, Preqin, a data and analytics firm for alternative assets, said in its Future of Alternatives 2027 report.
The data matches observations in Luxembourg’s alternative investments community that point towards strong growth, even though market conditions are difficult due to high inflation and geopolitical uncertainty. According to data from supervisor CSSF in its IAFM Reporting Dashboard, Luxembourg’s alternative investment market topped 1 trillion euro in 2020. An extrapolation of Preqin’s projection to the grand duchy suggests its alternative investment market could add another 1000 billion euro in the coming years, likely even more as Luxembourg is experiencing above-average growth in alternatives.
Retail fuels next growth wave
Retail interest in alternatives will fuel the next wave of industry growth, Preqin said. While private capital allocations have increasingly become a core part of institutional investor portfolios, high net worth investors have for the most part remained allocated to traditional investments.
“Private markets have been in a super cycle over the past decade,” said Christoph Knaack, CEO of Preqin, in a statement. “Due to lower risk adjusted returns in most traditional public asset classes, investors have had to look further afield to find alternative sources of return. However, the deterioration of the macroeconomic climate over the past year, from rising inflation and interest rates to geopolitical threats, means investors are now operating in a more challenging environment.”
“Against this backdrop, we expect to see more sustained growth in the asset classes which have historically performed well in more volatile markets, and which are able to provide inflation protection, such as infrastructure, natural resources, and private debt. Continued demand for these asset classes, coupled with a growth of retail investor interest in building allocations to alternatives, will drive private capital AUM to new heights over the next five years.”
CAGR to slow in next five years
Preqin found that, while the compound annual growth rate is expected to slow compared to recent years (to 11.9 percent annually between 2021-2027, from 14.9 percent between 2015-2021), investor demand remains strong as investors continue to seek alternative sources of returns in an uncertain economic environment.
When hedge funds are included, alternative assets AUM are expected to reach 23.3 trillion dollars by the end of 2027, up 71 percent from 13.7 trillion dollars at the end of 2021.
Preqin noted that the market faces a lack of products that are tailored for retail participation. This “has been one of the key barriers, but that is beginning to change, as the industry innovates, and the regulatory environment evolves,” it said.
In its report, Preqin said it expects growing retail investor interest in private investments – especially among high-net-worth investors – to be one of the key drivers of private markets growth in the future, particularly as a higher portion of institutional investors are approaching their current target allocation to alternative assets and may be forced to revise their target based on market conditions.
Private equity fundraising by sub-strategy and by region:
