Infrastructure will become one of the most popular asset classes for investors in the coming years as the alternatives boom keeps going, according to a recent report by McKinsey & Co.
The consulting firm concluded, after polling nearly 300 institutional investors managing $2.7 trillion in total assets, that the next wave of growth will come from investment in alternatives – defined by McKinsey as hedge funds, funds of funds, private equity, real estate, commodities and infrastructure.
Global alternative asset exposure hit an all-time high of $7.2 trillion in 2013. Over the next five years, net flows in the global alternatives market are expected to grow at an average annual pace of 5 percent, dwarfing the 1 to 2 percent expected annual pace for the asset management industry as a whole, the report said.
By 2020, alternatives could comprise about 15 percent of global asset management industry assets and produce up to 40 percent of revenues, it added.
The next wave of growth in alternatives will be driven disproportionately by a “barbell” comprised of large, sophisticated investors which are experienced in alternatives together with smaller investors which are “first-time buyers”.
Specifically, flows to alternatives from four types of investor — large public pensions and sovereign wealth funds, smaller institutions and high-net-worth/retail investors — could grow by more than 10 percent annually over the next five years.
Among larger, more sophisticated investors, real assets – including real estate, infrastructure, agriculture, timber and energy – are emerging as the next frontier in private investing, as these institutions look beyond relative investment performance toward more defined investment outcomes and seek to extract liquidity premiums while gaining exposure to hard-to-access forms of beta.
Sixty-three percent of the large institutions polled by McKinsey, with a size over $10 billion, said they are likely to increase allocations in infrastructure in the next three years, with a figure of 75 percent for real estate, 45 percent for private equity and 60 percent for real assets, according to the report.
In the meantime, the report stressed that demand for alternatives is not a short-term phenomenon – it identifies four structural trends that are driving increased allocations to alternative asset classes: 1) Disillusionment with traditional asset classes and products in an era of increased volatility and macroeconomic uncertainty; 2) Evolution of state-of-the-art portfolio construction; 3) Increased focus on specific investment outcomes; and 4) allocations out of “desperation rather than desire”.
“Taken together, these four structural trends will translate into continued robust demand for alternatives. McKinsey research reveals that large and small institutional investors alike expect to increase their allocations to alternatives over the next three years,” the report said.
In aggregate, the investors McKinsey surveyed expect alternatives to account for an average of 26.2 percent of their total portfolio assets by the end of 2016, up from 25.1 percent in 2013. Institutions with at least $10 billion in assets under management expect their alternatives allocations to top 29 percent by 2016, a full 5 percentage points above 2013 levels, it said.