Alternative investments (“AI”) can provide private investors a way to participate in investment vehicles and with management teams they otherwise would not have access to. They diversify portfolios in ways that often have a lower correlation to stock markets and can offer higher returns than a straight stock and bond portfolio.
AI investments include private real estate, natural resources, private equity and debt, hedge funds, and infrastructure. Natural resources include agriculture, renewable energy, timberland, water, and metals; all of which are gaining in popularity. Infrastructure includes energy, logistics, telecom, transportation, utilities, waste management.
– In 2020 global AUM for AI was estimated at $10.7T
– The largest components of global AUM in 2020 were private equity (41.1%) and real estate (33.6%), together accounting for 74.7% of the $10.7T total
– Global AUM for AI is projected to grow by 62% from 2020-2025, a 9.8% compounded annual growth rate (“CAGR”)
– Private equity and debt are projected to grow more quickly than other categories, with 15.6% and 11.4% CAGR, respectively. Private equity’s share of total AI AUM is projected to grow the fastest and increase from 41% to 53% by 2023. Private debt’s growth is fueled by investors searching for higher yields.
– The energy, infrastructure, hedge fund and real estate AI categories are projected to grow at rates of from 3.4% – 5.1%, with categories stated in order of highest to lowest CAGR.
– Real estate is projected to have the smallest growth rate, primarily due to continued Covid related uncertainty about the office and retail markets, but continues to be an investor favorite for yield potential, long term assets that generally can offer relatively stable cash flow and a potential inflation hedge.
Sources: Preqin (Nov 2020), Markets in a Minute from New York Life Investments, Visual Capitalist