Alternative investments becoming mainstream – but is access available for all?

For investors, the years since 2008 have been eventful. There have been global crises, unparalleled government interventions and a period of ultra-low interest rates. Now we’re experiencing the highest level of inflation for a generation. Policymakers are raising interest rates in an attempt to control rising prices, and it’s creating volatility.

Over this period, assets under management in alternative strategies have grown exponentially. Between 2008 and the end of 2021, they increased from $3.1 trillion to $8.5 trillion. The growth in private markets is expected to continue at pace, especially given the challenging environment faced by global investors.

What’s driving the growth in alternative investments?

Over the last few years, institutions have had to adapt to lower forecast assumptions from equities and bonds. This has accelerated the move towards alternatives, as institutions seek higher returns to meet their liability targets. This is shown through Invesco’s capital market assumptions (CMAs) which provide long-term estimates for the behaviour of major asset classes globally. 

The unique characteristics of alternative assets such as private equity, private debt, and direct real estate mean that they offer diversification benefits. Typically, they also generate higher returns than public market assets.

Alternative reality: challenges for investors

Although alternatives are attractive for a variety of reasons, they are not all the same. Private market opportunities are increasing in breadth, but growth in scale and complexity may make this market harder to navigate and implement.

Managing liquidity is a big consideration, as private market alternatives tend to have longer lock-up periods than public market investments. It is possible to manage this effectively, but the right skillset is needed to align the timing of capital flows with investors’ liquidity needs.

Resource challenges can also be an issue. A lot of time and expertise is needed when assessing private markets and sourcing compelling risk-adjusted return opportunities. These resources are particularly important during the manager selection process, as identifying top performing managers is essential.

Once key asset classes and managers have been identified, the next notable barrier is minimum AUM and fee requirements, which can be too high for many schemes to overcome. Recognising this challenge, Invesco has developed an Alternative Solutions Platform. This provides streamlined access to our in-house alternative capabilities together with high quality investments from leading partner firms.

Using this multi-manager platform, pension schemes can benefit from economies of scale and lower minimum investment requirements. Importantly, they can also tap into our expertise on asset classes like senior loans, real estate, private credit and infrastructure. The platform also gives pension schemes access to our global resources and proprietary analysis. Through this ‘extension of staff’ approach, we can reduce the administrative burden for schemes in terms of monitoring, oversight and reporting.
 

Alternative thinking: accessing opportunities via our private market platform

We started this piece by noting the rapid growth in alternative assets over the past decade and a half. And it’s a trend that isn’t going away any time soon. Investment Week recently noted that demand for alternative assets is ‘set to grow by up to 46% over the next 12 months’, with inflation, diversification and potentially higher returns driving this interest.

Through our analysis and research, we believe private markets can be highly complementary for many institutions. While some institutional investors may have struggled to access private market assets in the past, solutions like our Alternatives Platform are opening the asset class up to a wider audience today. We believe this is an important step in helping clients achieve their investment objectives against a challenging market backdrop.