The shifting landscape powered by emerging global macroeconomic trends has the potential to upend traditional investment strategies as interest rates, inflation and currency moves seem set to challenge investor expectations for the year ahead.
Going into 2023, institutional investors are still planning to move additional capital to real estate, infrastructure, private equity and credit strategies. Most observers point to a denominator effect that should indicated a slowdown of capital inflows, yet the interest in achieving positive gains over longer time frames seems to take precedent with most modern-day trustees despite well founded concerns of critics that see valuations not being marked down appropriately and liquidity of underlying assets possibly being challenged.
Allocators are also set to ramp up their rethink of “the R word” — Risk! With recession fears and uncertainty as to how long a global recession could play out, we have seen some increased dialogue pertaining to risk mitigation and risk parity as investors seek to make sense of the worst U.S. equity market performance since 2008 and what substitutes are reasonable sources of alpha going forward.
With all that in mind, we at Alternatives Watch thought this was a good time as any to outline some of the key investment trends on the horizon.
Based on some of our reporting over the last year, we will explore these concepts by asset class. While this list is by no means exhaustive, we see the following as some of the key developments both investors and managers need to follow closely.
1. Private equity illiquidity premium challenges
Hedge fund managers and investors are often the first to criticize private equity valuations, but as many expect the stock market downturn to continue, the idea that private equity firms can hold assets for longer may not hold weight. The question of annualized gains being marked in line with market conditions is one that more industry participants will have to answer with greater clarity and transparency.
The continuation fund craze ramped up in 2022 due to LPs’ belief that sticking with an investment longer will have a better payoff. As exit options likely deteriorate there will be certain sectors more likely to benefit than others, such as biotech and enterprise software. This realization is likely to further fuel the secondary market as more LPs need to make more room for re-ups to the private equity giants they have become accustomed to doing business with.
2. Credit managers to welcome a new distressed cycle
Credit strategies have boomed over the past year with traditional private equity firms launching divisions as well as credit shops offering loans to PE-sponsored companies. Origination is likely to continue its steady rise, but for those allocators looking to further diversify into distressed debt, the coming recession may hold some promising opportunity as interest rates continue to go higher thanks to moves from central banks globally.
Investors originally flocked to the space in 2020 due to corporate continuity concerns stemming from the pandemic. We are hearing of increased interest once again as more allocators drop traditional bond strategies to more esoteric approaches that stretch over longer time frames.
On a geographic basis, we have seen increased interest in European debt as this market has traditionally been off limits to non-bank lenders. There too given macro-economic concerns suggests that some distressed investment plays may be on the horizon.
3. Real estate players continue to dive into multifamily housing and embrace CRE debt
Speaking of debt, commercial real estate debt deals have been taking off even as the residential sector has shown some pricing pressure. Office buildings in Europe have seen a great deal of activity, but even in the U.S., hotels, offices and malls are on managers’ shopping lists.
For private real estate firms that once allocated heavily to industrial warehouses and logistics plays due to the pandemic, the focus toward affordable housing and luxury apartment complexes in the Sunbelt is likely to continue into 2023 as builders continue to redevelop aging housing stock.
Then in line with inflation, many investors are eyeing not only growing their real estate allocations, but also REITS are expected to continue to outperform despite Blackstone’s recent liquidity woes.
4. Infrastructure continues to march to its own green revolution
While 5G and telecommunications infrastructure dominated the asset class a short two years ago, the renewables revolution has broadened the portfolio of many infrastructure players globally. The move is set to spark greater interest on the part of institutional allocators eager to be seen as employing ESG-friendly investment initiatives. We predict more high-profile global-oriented closed fund launches will emerge in the months to come in collaboration with some of world’s largest asset owners.
5. Hedge fund attrition ramps up as multi-strategy approaches dominate
When the stock market was booming the story was fees, but now the story of ultimate survival of some strategies is in play as the industry once again takes inventory on what it has to offer institutional investors in terms of actual market hedging. The second half of 2022 saw some increased investor inflows, but the industry’s AUM has continued to stagnate.
Rising interest rates it can be argued has helped boost global macro and systematic trend following strategies that in many instances returned more than 30% and outshone the rest of the alternative asset industry. The question remains whether that will continue as the U.S. central bank’s ability to hike interest rates without inflicting widespread economic damage is challenged by many macro managers.
Yet, artificially low rates fed a roaring stock market post the Global Financial Crisis that in turn forced many hedge fund managers to look farther afield from traditional short or arb strategies. In fact, many firms have grown their private equity, crypto and credit portfolios to the point that many would question whether they qualify as hedge funds. That existential crisis of whether the hedge fund label still applies may just be answered in 2023.
Here at Alternatives Watch we look forward to diving down deeper to each of these trends and others as they develop. With trillions of assets set to change hands in the years to come, there are plenty more stories to be told in the next 12 months and we look forward to sharing them with our growing community!