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Flows of money moving into so-called alternative investments have slowed down this year, defying a predicted boom for funds with portfolios outside traditional stocks and bonds.
Alternative funds — which invest in assets such as private equity, hedge funds, real estate and credit — have raised $740bn since the start of the year, down 27 per cent from $1.02tn in same period last year, according to data provider Preqin.
The data shows how investor interest has moderated for a sector that was expected to double in size between 2021 to 2026, bringing assets under management to $26tn, according to a 2022 Preqin report. Alternative funds raised $1.5tn in 2022 as a whole.
“Fundraising has been more challenging in the last 12 months than any time in the last 15 years,” said Drew Schardt, the head of investment strategy at private markets investor Hamilton Lane, which produces a closely watched report on the sector. “It’s all changed.”
Schardt cited volatility, geopolitics and interest rates, which have all shaken markets in the past year, as causes.
The pullback comes after a frenetic period of dealmaking, with large, institutional managers and mutual fund houses swallowing up alternative managers in a race to offer the products to investors.
But falling stock markets last year prompted some investors to reassess allocations to alternatives at the start of 2023. Institutional investors such as pension funds, endowments and foundations have self-imposed limits on the balance of capital they can invest in each asset class, and prior commitments to “alts” such as private equity left many overexposed and unable to allocate more.
“The institutional bit of alts has slowed down,” said Jenny Johnson, chief executive of the fund manager Franklin Templeton. She noted that interest from wealthy investors and wealth managers was increasing.
Alternative funds have also not been paying out as much cash to investors due to depressed valuations and a stagnant IPO market that has made managers reluctant to sell assets, restricting the fresh capital that their investors would allocate to new funds.
Institutions looking to reduce their exposure to private equity have also caused a boom in the secondary market where PE stakes are resold, she said.
Private credit and some parts of commercial real estate — a sector hit hard by the pandemic — have been other brighter spots for fundraising, while asset classes such as private equity and infrastructure are on track to raise less than in previous years, according to Preqin data.
“It’s still growth, albeit smaller growth for now,” said Alex Blostein, an analyst at Goldman Sachs. “Even the managers who are struggling are just raising less rather than raising nothing at all, and it’s asset-class dependent.”
The number of alternatives funds raised since the start of the year is down by 53 per cent compared with the same period in 2022, while the average fund size, $600mn, is nearly $200mn higher than in 2022, according to Preqin. Managers say the shift points to a flight to larger, more established managers.
As the market for alternatives remains sluggish, “it is taking longer for existing raises to get done and it will take firms longer to come back to market with their next vintage”, Blostein said. For new alternatives offerings, “if you were going to go out in 2024, maybe now it’s going to be 2025”.