High-net-worth investors (HNWIs) are allocating more to alternative assets such as private equity and private debt, as they diversify away from quoted markets in search of higher returns.
Connection Capital’s private client Alternatives Investment Survey has revealed a radical overhaul of the traditional 60 per cent equities / 40 per cent bonds mix as investors shake up their portfolios in the face of dwindling returns.
The survey has found that HNWIs are including much higher weightings of alternative investments in their portfolios than five years ago, with 41 per cent now allocating more than 20 per cent to the asset class.
In 2018, the first year the survey was carried out, 26 per cent of respondents had 20 per cent or more of their portfolios invested in alternatives. This rose to 35 per cent last year.
Almost 74 per cent of HNWIs are now allocating more than 10 per cent of their portfolios to alternative investments, up from 68 per cent last year and 50 per cent in 2018, demonstrating how mainstream the asset class has become.
Alternative investments include private equity, private debt, commercial property, infrastructure, and alternative fund strategies.
Interest in alternative assets gained extra momentum during the Covid-19 pandemic, when many private investors increased their liquidity so that they could seize good investment opportunities when they arose.
“Experienced private investors are not just dabbling in alternative investments – many are carving out a significant space for them as a vital component of their portfolios,” said Connection Capital managing partner Claire Madden.
Madden pointed to inflation, rising interest rates, recessionary fears and geopolitical risks as having undermined trust in the 60/40 equities/bond split.
“One of the attractions of alternative assets as an investment class is that it is so wide-ranging: you can diversify into alternatives and then you can diversify within them as well,” she added.
“Private investors are particularly on the lookout for investments where returns are capital in nature, and where there is scope to be opportunistic, for example, where market volatility has had an impact on pricing.”
The survey found that 33 per cent plan to increase their exposure to alternative assets over the next 12 months, whereas just 14 per cent expect to increase their exposure to quoted equities.
Fewer than a fifth (18 per cent) say they feel optimistic about the outlook for quoted equity performance over the next 12 months.
Private equity is the most sought-after alternative investment class, with single private equity transactions and growth and buyout funds seeing most interest from private investors, followed by special situations and distressed debt funds, later stage venture capital investments and PE secondaries strategies.
Private equity’s position as a long-standing top performer is a key motivator. According to McKinsey, private equity has been the highest-performing private market asset class over the past decade with a median net internal rate of return of 19.5 per cent.
It also continues to outperform public markets, with median funds in every private equity vintage since 2009 returning at least 1.06 times their public market equivalent to date.
“Since many private investors have created significant wealth by running successful businesses themselves, and due to its consistently impressive performance, private equity is often a frontrunner when it comes to considering which alternative assets to invest in,” said Madden.
“However, we are also seeing a lot of open-mindedness about options such as private debt, commercial property, infrastructure funds and other alternative fund strategies as the opportunity set and value proposition become clearer and investors get more comfortable with the idea of branching out.”