Rediscovering alternative assets in changing times

Marc Schmidli Partner, Deals Leader, PwC Switzerland 27 Nov 2018

With market conditions and investment opportunities changing, asset managers should re-think their approach to alternative assets. In this article, we will explain why alternative assets can be a great way of diversifying and enhancing returns. 

Alternative asset classes have generally been the go-to approach for investors seeking a more attractive alpha. This is because low interest rates in the past, and the impact of quantitative easing, which has made the markets expensive.
The problem is that as the market has adjusted to a range of factors, including surplus capital, valuations have risen, and prospective returns have fallen.

Consumer lifestyle changes, emerging technologies, new business models and geopolitical shifts could all jeopardise real assets, but also open doors to new opportunities.

Another challenge for asset managers is the way new entrants are gaining a greater share of the market.
In our report (see below), we examine the causes of these transformations and shifts in the following asset classes:

Private equity

New terms

Increasing competition and entry prices have sent potential returns on private equity into decline. High returns are no longer a certainty.

Patient investors are choosing to specialise their investments and place them in long-term funds, including new evergreen structures, with terms of ten years or longer - compared with the six to eight year terms of traditional vehicles.

Real estate

Accessing operational expertise

Investors used to earn strong returns on real estate. But this is being compromised by innovative business models and changes in the interest rate environment.

The nature of real estate, both as an investment class and as a product or service, has been slowly shifting. People are showing increasing interest in access, rather than ownership. For this reason, investors should be finding new ways of accessing operational expertise cost-effectively. If they fail to do so, they will run the risk of diminishing returns.

Infrastructure

Pushing the boundaries

Infrastructure assets have been slowly redefined by a decline in the pipeline of low risk, mature, investable (core) assets, as more assets are being held by long-term investors.

With investors setting their sights on the long -term, income-generating characteristics of this asset class, new capital has been flowing into the infrastructure sector. To adapt to these changes investors should be building stronger management teams and leadership skills, developing their asset monitoring capabilities, reshaping assets, and pushing the boundaries of infrastructure.

Hedge funds

Earning alpha, harvesting beta

Larger, multistrategy funds that offer diversification to institutional investors and differentiated speciality managers are currently in high demand.

Technology and data are forcing the hedge fund industry to reinvent its investment edge, and refresh its brand − and come up with new strategies for earning alpha or harvesting beta.

Credit/private debt

Squeeze on returns

The global regulatory framework has taken its toll on financing, by increasing the cost of capital associated with loans.

Even in this relatively new credit asset class, asset managers are being forced to seek returns in niche areas, and some are even setting up new businesses to source credit.

The paradigm: strategy, technology and people

  • Strategy: alternative asset management is changing, and it’s time to get a clear view of those changes and figure out new ways of configuring investment portfolios and teams accordingly. 
  •  Technology: technology-driven change, digitalisation, artificial intelligence and alternative data are reshaping the market across all asset classes. Investors will have to invest in and develop new business models, learn their lessons from these investments, and rediscover new value.
  • People: New technologies don't only affect employment models; they’re also impacting the skills and investment strategies required [to manage alternative assets]. Asset management teams should look beyond traditional investment silos if they’re to survive in a new market with new entrants, and new human capital requirements.

 

Contact us

Marc Schmidli

Marc Schmidli

Partner, Deals Leader, PwC Switzerland

Tel: +41 58 792 15 64