Alts Managers: Don’t Expect to Keep Growing So Quickly

The next five years aren’t going to provide the same growth opportunities as the last few years have for alternative asset managers. 

The annualized growth of private capital assets will slow to 11.9 percent between 2021 and 2027, down from an average of 19.2 percent between 2018 to 2021, according to Preqin’s latest projection in a report titled “The Future of Alternatives in 2027.” Still, total assets in private equity, venture capital, private debt, infrastructure, real estate, and natural resources, are expected to reach $18.3 trillion by the end of 2027, up from $9.3 trillion in 2021.

Rising interest rates, which push the valuations of public and private investments lower, are the primary driver of the expected decline in growth, according to Sam Monfared, vice president of research at Preqin. Low interest rates have helped private equity firms and venture capitalists deliver stellar returns in recent years. 

“We think that moving forward, growth is going to be normalized. What we had during Covid was certainly great, but it probably wasn’t sustainable,” Monfared told II. He added that the growth rate would likely revert to the level seen between 2015 and 2018, when global central bank policies were less aggressive.

Despite facing headwinds in fundraising, venture capitalists are facing a relatively bullish environment for asset growth. According to the Preqin report, the compound annual growth rate of venture assets is expected to be 19.1 percent, on average, between 2021 to 2027 — the highest of all private asset classes. Still, it is dwarfed by an average annual growth rate of 30.9 percent between 2018 and 2021 for venture capital assets.  

Venture capital growth is holding up in part because of strong return expectations. Venture capitalists are expected to generate an average annual return of 14.6 percent before 2027 — higher than the return predictions for private equity (13.5 percent), infrastructure (11.6 percent), real estate (9.2 percent), and private debt (8.4 percent).

“As private equity becomes more mature, people would ask, what are the alternatives if I don’t necessarily need the cash flow from [PE-backed] companies? Would I be able to allocate my capital to other assets and have higher return expectations? Venture capital offers that alternative,” Monfared said. 

While infrastructure and private debt don't lead in terms of return expectations, they are likely to follow venture capital in asset growth. According to Preqin, infrastructure and private debt will have an annual asset growth rate of 10.6 percent and 10 percent, respectively, between 2021 and 2027. The projections are backed by strong recent fundraising. In North America, infrastructure-focused funds raised over $90 billion in the first half of 2022, running at twice its usual pace. Growth was fueled in part by the Inflation Reduction Act and the $1.2 trillion infrastructure bill. Previte credit funds also raised $45 billion in the first quarter, a pace that would make 2022 the biggest fundraising year for the asset class ever. 

The growth outlook looks less rosy for private equity firms. While PE funds in North America will see continuing asset growth, those in the Asia-Pacific region are likely to take a hit as a result of the deteriorating exit environment, according to the report. China, in particular, has undermined investors’ confidence in the region with surprise rate cuts and crackdowns on the property, education, and technology sectors. 

Hedge funds are also going to see more outflows in the current market before bouncing back. According to the Preqin report, the average return of hedge funds was negative 9.3 percent amid the market dislocation in the first half of 2022. The loss in the first half has led to $7.7 billion in net outflows, according to HFR data. “This leads us to believe that the industry will likely feel some short-term pain before seeing growth in the longer term,” the report concluded.