Private Capital Stands Out As Alternative Assets Hit Record High

Tom Burroughes

6 September 2017

The alternative assets industry, covering private capital, hedge funds and real estate, rose to reach a record of $7.8 trillion last year, with some quarters such as private debt and equity drawing investor interest even though hedge funds lost some momentum, figures show.

, a research firm tracking the sector, said hedge funds saw their assets hit a record $3.25 trillion, despite net investor outflows through the year. Private capital funds, meanwhile, increased their assets by more than 7 per cent, rising from $4.27 trillion as of the end of 2015 to $4.59 trillion 12 months later. Private equity funds represent the largest proportion of this group at $2.58 trillion, followed by real estate ($785 billion), private debt ($605 billion), natural resources ($501 billion) and infrastructure ($388 billion) funds.

Based on median returns reported by public pension funds, over the five years to the end of 2016 private equity funds have generated a median net annualized return of 11.4 per cent, while real estate funds have returned 11.3 per cent. This compares to 5.2 per cent for hedge funds, and 9.1 per cent for listed equity.

Private equity funds have seen median net IRRs exceed 10 per cent for every vintage year since 2007, while real estate fund median net IRRs have surpassed 14 per cent in every vintage year from 2009 onwards. Only two vintage years in the 21st century, 2005 and 2006, have seen median private equity returns fall below 10 per cent.

The superior returns – so far – of private equity funds over certain other categories has drawn in heavy inflows, raising concerns that at some point an excess of unused capital – sometimes known as “dry powder” will become a problem if that money cannot be put to work. A recent, separate report by Preqin said there are some concerns about the sheer number of private equity funds on the road. Even so, the fact that private capital has delivered superior yields to traditional markets such as equities has been attractive at a time of low, or even negative, real interest rates.

Although most hedge funds have gained ground this year, the fact that their performance in aggregate since the 2008 financial blow-up has been relatively muted has seen their traditional management and performance fee mixes of 2 and 20 per cent, respectively, come under pressure. Private equity, by contrast, has seen marginally less of a squeeze on fees, as argued by the Swiss private bank Pictet (see an article here).

A majority of investors told Preqin in June this year they were satisfied with the performance of their investments across most asset classes. However, there is a sharp divide in opinion: over the three years to the middle of 2017, more than a fifth of investors in private equity, real estate, private debt and infrastructure said that these asset classes had surpassed their performance expectations. Conversely, across the same period 50 per cent of natural resources investors and 70 per cent of hedge fund investors felt that their portfolios had underperformed.