Many alternative investment sponsors have dedicated themselves to fundraising opportunities in recent years, generating record-breaking growth stats. Last year was a banner year with $86.1 billion in inflows, more than three times the 2020 total of $27.3 billion, according to Robert A. Stanger and Co.1 January inflows have sent projections even higher for this year with Stanger projecting $120 billion for 2022.2
The primary growth drivers have been strong returns, demand for income producing investments, and a pressing need for diversification. Let’s briefly evaluate each of these factors.
Returns
Most often, asset class performance varies considerably from year to year with certain alternative asset classes having more extreme volatility than others. It is not uncommon for one asset class to rank worst for performance one year, and then produce momentous outperformance the next year.
The FTSE Nareit All REITs Index has shown oscillating positive and negative performance numbers each year since 2017. For perspective, the return for 2021 was 39.88% while the average annual return since 1972 is 11.99%.3
The Stanger NAV REIT Total Return Index, which was started on December 31, 2015, shows less volatile returns for non-listed REITs compared to traded REITs but year-to-year performance still varies significantly.4
In any event, if there is anything foreseeable about investment returns, it is variation.
Income
Lower yields from traditional fixed-income investments have pushed investors to seek alternative sources of income, boosting allocations to alternatives and offering a massive fundraising opportunity for alternative investment sponsors.5
The flip side should also be considered now that interest rates are increasing. Rising interest rates make bond yields more attractive and bond funds more competitive as a source of income. Once traditional bond fund yields are no longer an investor deterrent, those seeking income sources could potentially allocate more to this class due to liquidity and accessibility advantages.
Diversification
Alternative investment classes have a relatively low correlation to other major asset classes. For this reason, they are an effective way to diversify an investment portfolio.
Research shows that REITs can offer inflation protection. Even with recent interest rate increases, inflation is unnaturally elevated at the moment, which may result in increased allocations to REIT investments.
Institutional investors generally allocate around 25-30% to alternative asset classes while retail investors average closer to 5%. The much lower retail allocation is a result of inaccessibility rather than a lack of demand. With expanding access, many expect to see a gradual increase in alternative investments from the retail business segment.
No matter how strong the asset management capabilities, these three variables impact your business. To retain investors and firm profitability, combining sound asset management with meaningful client connection and an efficient operation is optimal.
Considering the exigent digital transformation in financial services, along with the tight labor market, technology is a reliable way to approach these goals.
Investor service and recordkeeping involves many routine processes, nearly all of which can be automated. Even for the most unique alternative investment types, there are technology solutions that can handle your client onboarding, distributions, and statements, just to name a few, and free up your team for more customer friendly activities.
Another area where alternative investment sponsors are catching up is providing investors with online access to their account information. Consumers in all industries have rapidly become accustomed to obtaining just about anything they need via the internet. An easy to use, device-responsive, secure, web portal is today’s expectation for a positive customer experience. This will also contribute to time savings, e.g., cost savings, because investors will have a way to independently view their account information, retrieve documents and even change their address or dividend distribution options if the sponsor firm chooses to allow it.
Product innovation creates challenges for business operation status quo. Aligning with technology platforms that are open and flexible can inspire a warmer welcome of new ideas and help mitigate some of those “operational nightmares”.
Although recent asset growth has been exceptional, we do not know what the future holds. As we plan ahead for different business scenarios, we should be strategic about our operational infrastructure. This year is a good time to prioritize asset retention and cost management, both of which go hand in hand with investor service and operational oversight. Your choice of technology today should be built to evolve with your business, industry dynamics, and all plausible scenarios in the future.
Sources:
1 https://www.ipa.com/wp-content/uploads/2022/01/Press-Release-1-25-2022-NT-REIT-Fundraising.pdf
2 https://thediwire.com/non-traded-alts-on-pace-to-raise-120-billion-in-2022-following-record-breaking-january/
3 FTSE Nareit All REITs Index - Data
4 https://www.ipa.com/wp-content/uploads/2021/11/IPA-STANGER-MONITOR-FALL-2021.pdf
5 Preqin Special Report: The Future of Alternatives 2025