BAI Survey Highlights Investor Optimism in Alternatives Post-2023

“Fundraising for alternative asset classes in 2023 was very much in line with pre-pandemic levels and remains elevated by historical standards, pointing to still-resilient demand.” - Nikolaos Panigirtzoglou, Global Markets Strategist, J.P. Morgan.

Alternative investments — including private equity, infrastructure, hedge funds, and private debt — offer opportunities that can shape portfolios in ways traditional investments often cannot.

But at the same time it’s true that 2023 was a difficult time for private equity managers due to macroeconomic uncertainty. That said, there are lots of reasons to be optimistic. Despite some headwinds, investors continue to seek alternatives as a bridge to diversification and greater return.

With traditional investments, such as stocks and bonds, expected to deliver relatively modest returns of around 5% annually over the next decade, both institutional and individual investors remain interested in alternatives to meet their portfolio diversification and greater return objectives.

A recent survey of 109 institutional investors across Germany appears to back up these salient points: the future of alternatives has a lot of investment opportunities and things are looking brighter. Alternative assets like private equity, hedge funds, infrastructure, private debt, and real estate offer the potential for strong risk-adjusted returns.

Investors are largely either sticking with their lot or leaning further into different types of alternative investments in search of diversification and growth or higher returns, according to the Bundesverband Alternative Investments 2023 Investor Survey.

But, like any financial venture, alternative investment is not without its bumps or challenges along the way. Here’s a closer look at the key findings from the latest BAI Investment Survey, which gathered insights from a diverse range of limited partners in Germany.

These included heavyweights like insurance firms, corporate investors, philanthropic foundations, banks, and charitable organizations. Interestingly, these LPs manage over €2.4 trillion in balance sheet assets, which accounted for close to two-thirds of the balance sheet assets for all institutional investors in Germany.

Resilient Demand Drives Investor Interest in Private Equity

Let’s start with the great news: resilient demand. Alternative investments, like private equity and venture capital, still promise the kind of opportunities that make investors sit up and take notice, especially in contrast to traditional assets.

The BAI survey highlights that 46% of investors planned to increase their allocations to alternatives in 2024. Just 9% of investors indicated that they wanted to reduce involvement in alternative investment funds.

According to the McKinsey Global Private Markets Review 2024, despite a challenging environment in 2023 for attracting investments, certain private equity strategies and managers, particularly buyout managers, excelled in fundraising. Buyout funds, which focus on acquiring companies to drive value, had their best year ever, collectively raising over $400 billion.

Fundraising in Europe surged by more than 50%. This significant boost resulted in the highest capital raise in the region’s history despite the recent period of volatility.When we look at the BAI sentiment data on alternative investments, it’s clear where the momentum is building and where it’s not. According to the survey, showing planned investment allocation, there are some notable trends among institutional investors:

• Private equity, private debt, and infrastructure is expected to see significant fund inflows, signaling strong confidence in these areas for long-term growth.
• Real estate is facing more outflows than inflows. Investors seem to be pulling back with sentiment tending to be negative.
• Real estate debt presents a mixed picture. New investors are still interested, but many current investors are holding steady or reducing their allocations.
• Hedge funds and liquid alternatives saw more investors reducing their involvement, according to survey respondents, yet the overall sentiment remained "slightly positive."
  
  

Relief from the Denominator Effect: Market Recovers Easing Pressure

In 2023, alternative investments lagged behind public markets, leading to an overall 22% drop in fundraising. Limited partners have struggled with the denominator effect and a slowdown in distributions, contributing to the decline.

But according to the BAI analysis, the denominator effect, which happens when private investments seem larger due to a drop in public market values, is fading. Data from last year indicates that private market investors experienced relief due to rising equity prices and a temporary halt in interest rate hikes.

This helped reduce some of the strain caused by the denominator effect.Private debt and infrastructure debt are expected to see significant fund inflows. But in contrast, the BAI Investor Survey 2023 indicates that crypto investments have not yet developed into a mainstream financial asset class for institutional investors.

Despite the growing interest in alternative investment products, crypto assets continue to face hesitation from institutional players in Germany.

Inflation Protection: A Growing Focus

Inflation is the elephant in the room these days. While inflation protection hasn’t always been the top priority for investors in alternative markets, that’s changing, according to the BAI survey. With inflationary pressures creeping up, many are looking to alternatives, specifically real assets like infrastructure and real estate.

These investments are tied to inflation. Whether it’s utilities or rental properties, the income streams from these assets tend to adjust upward with inflation, making them a great buffer against rising prices. That’s why more institutional investors appear to be making inflation protection a priority in 2024.

ESG Goals: Not the Main Driver (Yet)

We all know ESG (Environmental, Social, Governance) is top of mind for many investors, especially in the public markets. But the survey shows that when it comes to alternatives, ESG isn’t the primary motivator at the moment.

That doesn’t mean it’s irrelevant. We’re seeing more General Partners incorporate ESG principles into their strategies, and certain alternative assets, like infrastructure, naturally align with sustainability goals. But right now, the primary driver for investing in alternatives is still the strong risk-return profile and the diversification benefits.

According to the BAI survey, when selecting a fund manager, the ESG approach is considered less critical than factors like the manager's track record, reputation, and level of specialization.

Liquidity: The Challenge We Can’t Ignore

Liquidity has become a pressing issue for investors as rising interest rates make it difficult to fund private market investments. The BAI survey shows that investors are realizing that their fixed-income investments — once a dependable source of liquidity — are no longer as easily liquidated to fund private market commitments.

Without sufficient liquidity, investors could find themselves in a bind, unable to meet capital calls or fund new investments. To address this, investors are leaning more heavily on scenario analysis. By planning for different market conditions, they can better anticipate liquidity shortfalls and avoid becoming forced sellers in a down market.

Here’s the key takeaway: liquidity challenges aren’t going away, but they can be managed with the right strategies. It’s all about preparation, and the smartest investors are those who are thinking two or three steps ahead.

The Bottom Line: The Future Is Bright With a Few Challenges

Where does that leave us? Alternative investments are here to stay, with investors focusing on them for their potential to deliver strong returns, diversification, and protection against inflation.

While challenges certainly exist, they can be mitigated with the right investment strategies, particularly when it comes to equity investments, private investments, and planning for future results.

According to J.P. Morgan’s global research on the investment universe, while alternative investments underperformed in 2023, demand for these asset classes remains resilient, with strong fundraising continuing into 2024.

“Fundraising for alternative asset classes in 2023 was very much in line with pre-pandemic levels and remains elevated by historical standards, pointing to still-resilient demand,” reported Nikolaos Panigirtzoglou, Global Markets Strategist at J.P. Morgan.

“Fundraising has also had a strong start to the year, which if sustained would make 2024 a significantly stronger year than 2023.”

The most successful investors will be those who take proactive steps, such as conducting thorough due diligence and anticipating liquidity concerns. 

But the future of alternative investments does look promising, with ample opportunities for investors who are prepared to seize them. By making informed investment decisions and using tools that help streamline fund operations, the rewards are certainly still out there.

Amid growing concerns around compliance and administrative challenges, it's essential that fund managers and investors have access to solutions that can make things easy.

At Vestlane, we provide just that. Our digital platform is designed to speed up the private investment process, helping fund managers meet their obligations without being overwhelmed by paperwork. Plus, investors benefit from a secure, transparent, and efficient experience in the private marketplace.

Our approach focuses on automation and integration, reducing onboarding time and ensuring fund managers remain compliant with comprehensive KYC (Know Your Customer) and AML (Anti-Money Laundering) processes. The platform facilitates real-time data access, ensuring that fund managers are always audit-ready.

Schedule a personalized walkthrough with Vestlane to explore how we can elevate your fund’s performance and receive a tailored estimate in just 30 minutes.