Total assets under management (AUM) held by Europe-based alternative asset fund managers have reached the €2tn mark for the first time.
According to the 2020 Alternative Assets in Europe report from Preqin, in partnership with Amundi, this figure is up from €1.79tn at the end of 2018, and €1.39tn at the end of 2015. Private equity (€795bn) and hedge funds (€609bn) comprise the majority of the €2tn total, as of December 2019.
The report goes on to describe the growth of the European alternatives sector as “impressive”, after registering an increase of more than €200bn in just 12 months. Indeed, AUM grew by 44% between December 2015 and December 2019, and Europe now accounts for a fifth (21%) of the global alternatives industry.
A spokesperson for Amundi tells EI investors are increasingly looking to diversify portfolios with alternative assets, or non-traditional assets, in place of stocks: “Investors recognise the fact that private capital funds have generally outperformed public markets by around 4% a year and recovered quicker from crises like the GFC, making them an attractive option as economies recover from the initial shock of the coronavirus”.
The spokesperson adds: “Investing in the real economy is also beneficial for an institution’s ESG profile, with European regulators playing an important role in accelerating this trend. Preqin forecasts that alternative assets will account for around 40% of total management fees in 2025, helped by the widening of accessibility for a bigger pool of investors – such as wealth managers, high net worth individuals and even retail – so we expect continued growth in allocation.”
Acknowledging Covid-19 had dampened activity across the region, the report goes on to note the alternatives sector remains robust and vibrant, and there are indications activity may rebound as restrictions are lifted:
“As with the wider financial landscape, the COVID-19 pandemic has caused significant disruption to the alternatives industry in Europe, with fundraising and deal-making being directly impacted since the start of the year.”
It adds: “But while activity is not at the record highs we have seen in recent years, funds are continuing to raise capital and managers are putting money to work, as investor appetite remains strong. Alternative assets are seen as a portfolio diversifier and volatility dampener and, overall, as a source of appealing risk-adjusted returns in a world of persistently low interest rates and volatile equities.”
The Amundi spokesperson echoed the report’s findings that the case for alternatives would continue to build momentum in an uncertain economic climate, saying: “Equity markets currently look a little more expensive after having a strong rebound from the crash at the beginning of the coronavirus pandemic, while current interest rate levels will probably not allow liabilities to be met via returns from the bond markets.”
The continued: “The relative outperformance of private markets and real assets are reassuring for investors seeking long-term stable returns, especially during a global economic crisis after which these asset classes have usually performed strongly.
“Investors are also starting to realise the performance of alternative assets is not measured solely by their illiquidity premium, but also by their contribution to the robustness of a portfolio through diversification, less volatility and sometimes an inflation hedge.”
So are we seeing a combination of issues driving the enthusiasm for alternatives – for example, Covid, ongoing fears of a US recession, friction between the US and China over future trade and uncertainty on Brexit?
Deborah Zurkow, global head of alternatives at Allianz GI, explains to EI that, for the most part, she does not see Brexit, a US recession and trade wars being contributing factors in pushing investors towards alternatives since alternatives were a trend that began well before these events.
She does, however, point towards the uptick in interest in sustainable solutions in private markets across the globe – which has further accelerated as a result of Covid – as well as ongoing environmental events and social inequalities.
“Covid and its implications are likely to provide some acceleration in the trend of increasing institutional allocation to alternatives,” says Zurkow. “It is important, however, not to interpret interest in alternatives as a cure for stockmarket volatility.
She adds: “Investors are torn between fear of losing out on a market opportunity and a very uncertain medium-term economic outlook. While there is consensus that, in the short term, central banks and government fiscal stimulus will keep default rates low, there is no real conviction for the medium-term credit cycle outlook among investors. As a result, we expect to see more interest in alternative strategies with a short-term nature, such as trade finance.”
The spokesperson for Amundi pointed out that, while the geopolitical factors in question were all able to provoke uncertainty in the public markets, alternative assets were not immune to nervousness around issues such as Brexit and the trade war.
They said increased enthusiasm for alternatives was more down to greater understanding and familiarity, adding: “Investors are now more knowledgeable about the long-term benefits of real and alternative assets when looking at returns. Alternative assets play a key role in financing the real economy – particularly when one considers the stricter regulation of banks and the disintermediation of the banking system.”
The move away from bank financing is estimated to represent between 75% and 80% of funding volumes in the US market and about 20% to 25% of all funding in Europe, where growth is faster.
Allianz’s Zurkow agrees with the view that greater understanding of alternatives over time has translated into greater investor participation. “The interest has changed over recent years,” she says. “It started initially from larger investors – however, we now see smaller players, who having wanted to see a track record, have spent time observing the market and become much more interested.
“The predominant motivation is the hunt for yield, with the asset class seen as a replacement of liquid fixed income classes by higher-yielding illiquid assets.”