There’s a gush of inflows into venture capital and other alternative investments. Investors crave better returns and lower correlation to a toppy Wall Street

Institutional investors have been upping their allocations to alternative investments. The flow comes in the face of diminishing returns and recessionary fears from traditional markets.

“The incentives for early exposure to rapidly growing, mature companies are still intact,” PitchBook senior manager Garrett James Black said in the firm’s 2019 Unicorn Report. “Unicorns aren’t going away anytime soon.”

Poor returns from traditional markets

Long term bond yields such as the 30-year T-bonds have tumbled to all-time lows. Investors have sought refuge in risk-off assets from an uncertain geopolitical environment.

But this is not the solution for investors such as pensions and endowments which have to meet “expectations they set years ago with their stakeholders”, according to Bryce Klempner, Partner, McKinsey.

Unimpressive show from listed companies and their diminishing number

Investors have also been forced to consider alternative investments such as venture capital and private equity because of weak performance from listed small caps. On the other hand, “private equity has, on average, managed to outperform public markets over the last couple of decades,” notes Klempner.

Also to note is the steady fall in the number of companies choosing to list, some of it due to M&A activity and consolidation. The 2012 JOBS Act, too, has been a great enabler in this regard, raising the limit of private shareholders in a company from 500 to 2,000.

Institutional investors choosing Silicon Valley over Wall Street

With the private markets coming of age and maturing in size, companies can easily raise funds without going through the hassles of an IPO.

According to data from Refinitiv, in the first half of 2019, total investments in venture capital hit a 19-year high of $53.3 billion – up 21% compared to the first half of 2018.

‘Tourist’ (read: foreign) investors are also jumping into the fray as they seek early exposures to multi-baggers such as Uber and WeWork.

Liquidity fears subside

A key deterrent used to be the difficulty of cashing out from private investments. With the increasing depth of private markets, this is no longer the case.

“It’s important to emphasize that multiple companies are now increasingly comfortable buying and selling the securities of large, privately held companies in private transactions at the scale of billions of dollars,” PitchBook’s Black said in the report.