Alternatives, Asset Allocation, Asset Managers, Consultants, Defined Benefit, Institutional Investors, Pension Funds, Private Equity, Public Funds

Investors in Alternatives Seeking Separate Accounts and Co-investments

Over the next five years, institutional investors in alternative assets will be looking to increase their investments in separate accounts and co-investments at the expense of pooled or commingled structures, for reasons of greater control and potentially lower management fees, according to a report just published by research and data firm Preqin, titled The Future of Alternatives.

“We are seeing demand from investors for these vehicles and fund managers are offering more types of these products as a way to differentiate themselves,” said Chris Beales, product manager and co-author of the report.

According to Preqin, 24% of the more than 120 institutions surveyed in June by the data firm are looking to increase their allocations to alternative asset separate accounts, while 65% are looking to remain at the same level and 11% are looking to decrease their allocation. In the co-investment category, 34% are looking to increase investment in alternative assets, with 62% looking to remain at current levels and 4% decreasing funds.

Thirty nine percent of asset managers that responded to the survey are looking to increase their offerings of alternative asset separate accounts, with 32% looking to stay flat and 28% expecting to decrease their offerings in the category. Forty-two percent of fund managers are looking to increase their offerings of alternative asset co-investment products, with 41% remaining flat and 17% looking to decrease offerings. Preqin surveyed 300 fund manager for its report.

“Co-investments offer investors greater access to and understanding of the underlying assets, often with less fees than commingled funds and more exposure to the performance of the asset class, because it’s a single asset,” Beales said. “Separate accounts are a more customized solution that allows investors to determine the general direction of the funds’ investments—which plays into investors’ desire to have more power and the ability to look more deeply into their portfolio,” he said. “Seeking more control and more customization, investors are becoming a bit more established and intuitive with their investments,” he added.

Stepping out on their own

Investors are growing more comfortable with the idea of plowing more cash into these alternative assets separate accounts and co-investment vehicles because many of them have already invested in alternatives through pooled or co-mingled accounts, so they now feel sufficiently competent to decide, more specifically, which type of investments they need in their portfolios, according to Beales. Many investors are also working with consultants, who are helping to guide them on their alternative asset choices. This has contributed to investors feeling more comfortable taking more control over what to invest in, Beales explained.

Lower fees than pooled accounts

Separate accounts generally require bigger initial investments from a single investor, based on which fund managers often agree to reduce fees. “All of this is driving why we are seeing a decrease of investment in pooled funds, where the fees are more rigid,” Beales noted. “Instead they are looking at a more customized structure.”

That may explain why in the pooled accounts category, the Preqin report found that 45% of responding fund managers are decreasing their investments in those vehicles, while just 13% are looking to increase investment, and 42% are staying flat. On the asset-owner side, 60% of investors surveyed said they are not changing their pooled-account allocations, while 25% indicated they are increasing it and 15% said they will decrease their allocation to alternative investment pooled accounts.

Investment in alternatives to rise over next five years

Overall, Preqin predicts a rise in investment in alternative assets. By 2023, alternative global assets under management are expected to hit $14 trillion, an increase of 59% since 2017, according to the report. By 2023, there will be 34,000 fund managers active globally, an increase of 21% from 2018.

Delivery of “superior” risk-adjusted returns—14% annualized in the five years to March 2018 for private capital funds—by the asset class has been driving the increase in interest and commitment to the asset class, according to the report. Also, investors are now seeking more ways to find alpha, as the number of publically listed stocks has been decreasing, as many businesses are now seeking capital in the private markets.

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