Preqin, a leading source for data and intelligence on the alternative asset industry, has published the results of its latest survey in a paper titled Preqin Investor Outlook: Alternative Assets H2 2014. The findings indicate that institutional investors are generally satisfied with the results of their alternative investment allocations, and are set to grow both their alternative investment teams and their allocations to alternatives.
Preqin asked investors questions to gauge their plans for alternative investments in the coming year, as well as their views on key issues facing institutional investors today, such as regulatory changes. The results make it clear that the outlook for alternative assets is very bullish, with many respondents indicating that they will be increasing their allocations to alternatives over the coming year, as show below:
While investors remain bullish on alternatives, it is not without concern for specific issues related to each investment category. Regulatory changes were top of mind for private equity investors, and a close second for hedge fund investors, but did not rank in the top three issues for real estate and infrastructure investors. Other survey feedback indicates that regulatory changes are viewed by most investors as either having a positive impact on the business, or a neutral impact. Only in the area of private equity did more than a quarter of investors view increased regulation as having a negative impact on the investment category.
Preqin’s study also found many institutional investors proactive in demanding information from fund managers, and in seeking more control with managed accounts and direct investments. Respondents also showed increased interest in actively seeking out quality managers, rather than waiting for ideas to be presented to them. All of these trends point toward a more competitive marketplace for alternatives, and a continued push for greater transparency.
Preqin’s survey included 380 institutional investors active in alternative investments. The survey’s scope was global in scale, with 47% of respondents hailing from North America, 29% from Europe, 18% from Asia, and 6% from elsewhere in the world. The respondents’ breakdown by investor type is listed below:
Preqin’s 42-page report is divided into five sections. The first, “Alternative Assets,” synthesizes the results of the four below categories of alternative investments, with the remaining four sections dedicated to detail on each of the four categories:
- Private Equity
- Hedge Funds
- Real Estate
Of the four individual categories, Preqin’s survey respondents were most bullish on private equity, with 51% having a positive perception of the category. Infrastructure and real estate each garnered positive responses from 48% of investors, while only 33% of respondents were bullish on hedge funds.
Due to the choppy markets and resulting hedge fund performance in the first half of 2014, along with subdued relative performance in 2013, investors showed a lower positive view of hedge funds versus other categories. Given the higher fees and lower levels of liquidity, the report noted that investors are now seeking out liquid alternative strategies that may replace exposures to hedge funds, noting that “more than half of surveyed investors currently allocating or considering allocating to alternative mutual funds or UCITS hedge funds in the future.”
Investors continue to staff up their alternative investment teams as the demand for alternatives continues to increase. While none of the survey respondents indicated that they will be decreasing investment staff, 28% noted that they will be increasing the size of their alternative investment teams over the coming two years.
In terms of deal sourcing, private-equity investors are the least likely to rely on outside sources for investment ideas, with 41% of private-equity investors saying they source their ideas internally; while this was true of only 27% of hedge-fund investors, 25% of real-estate investors, and 14% of infrastructure investors. However, this demonstrates that the majority of institutional investors are using outside sources for finding new investment opportunities across all four investment categories (see Fig. 1.12 below.) Investment consultants remain the top source for new investments across all categories except infrastructure.
Despite poor hedge-fund performance, Andrew Moylan, Head of Real Asset Products for Preqin, says institutional investors are generally satisfied, since all four alternative asset classes have been “generating solid performance figures” over the longer term. As for the outlook for alternatives, Mr. Moylan is confidently bullish: “Many investors have indicated to Preqin in our most recent survey that they intend to increase their allocations to alternative assets and make greater level of commitments over the next year,” he said, in a statement highlighting the survey’s findings. “As a result, many investors have recently grown their dedicated investment team to source new opportunities, and a number also intend to grow their teams over the next few years.”