Alts fundraising hits $248bn through May, while HF redemptions soar

Activity across the alternative investment spectrum remains brisk, and despite numerous challenges the industry has raised $248 billion in fresh capital through May, according to second quarter figures released by J.P. Morgan Asset Management and obtained by Alternatives Watch. This is a far-cry from 2019’s record-breaking year when $1.1 trillion was raised by managers across private equity, real estate, credit and hedge fund sectors. Much of that activity was in the private equity space where $133 billion fueled deals and topped off the record amounts of dry powder managers reported. Meanwhile, the hedge fund industry reported net redemptions of $33.3 billion as returns are largely negative amid the ongoing COVID-19 pandemic. In its second quarter breakdown on the alternative investment industry, J.P. Morgan illustrated the pandemic’s impact on chart after chart all while chronicling the fundamental shift from public markets to private markets that has continued unabated. In private equity, there were a total of 1,000 deals done so far in 2020, which is only slightly behind 2019’s activity when the entire year saw roughly 5,000 deals. Overall software and technology deals dominate in representing 30% of assets in private equity. Meanwhile, technology makes up only 21.5% of the S&P 500 index. Secondary market deals will be interesting to watch. According to the asset management firm’s figures, secondary market pricing and volume fell year over year between 2018 and 2019. Secondary buyouts fell from $180 billion in 2018 to just over $140 billion in 2019. In early 2020, fundraising in the secondary market remains brisk. Recently, the $96 billion global private equity firm Ardian announced that it has closed a record $19 billion in secondary private equity investments. The secondaries pool includes $5 billion for co-investments, and significantly exceeds Ardian’s preceding secondaries fund, ASF VII which came in at $14 billion in 2016. Real estate investing seems to have taken a hit along with credit and hedge fund strategies. Real estate assets dipped to $800 billion, which is down from the $1.2 trillion in assets at the end of 2019, according to J.P. Morgan. Despite the pandemic, rent collections on properties owned by REITs seems to be remaining stable from April to May, but inventory of flexible office space in terms of square feet is rising rapidly. Perhaps the most telling statistic is that the highest performing category in REIT portfolios year-to-date is data centers. The worst performer was lodging/hotels, which saw drawdown in value of 51.3%. On the credit side, there has been pandemic fall out in the area of collateralized loan obligations (CLOs) and leverage loans, which have been popular among alternative investment firms. According to statistics collected by J.P. Morgan, CLO downgrades rapidly rose from 25% of the underlying in March to 40% in May. Roughly 18% of the CLO market is exposed to COVID-impacted sectors such as transportation, gaming and lodging, services and retail. Then on the leverage loan side, downgrades are outpacing upgrades on a rolling 12-month basis. The pace of downgrades has already exceeded that of the global financial crisis of 2008 and 2009, according to J.P. Morgan’s charts. Meanwhile, in the hedge fund industry is experience an asset pull back with redemptions totaling $33.3 billion in the first quarter of 2020. Performance has taken a nose-dive as well with global macro being the top performer for the year-to-date with gains of 0.1%. The remaining strategies are all negative for the year, with the worst performance being in the global equities space where managers have tallied up losses of 21.3% on average. Like their private equity brethren, hedge funds are flocking to the same sectors of technology, health technology and finance. The main difference being that hedge funds are expressing their investment ideas via public equities. The sectoral bias likely falls in line with a long-term investment strategy of going long growth stocks and short value across many strategies including global multi-strategy and quantitative portfolios. For now, it is not an investment theme that is performing.

Alts fundraising hits $248bn through May, while HF redemptions soar

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