Macro trends in alternative funds and institutional investment

Macro trends in alternative funds and institutional investment

The Alternative Funds and Institutional Investment industry covers a spectrum of disciplines and evolves over time as opportunities arise or market dislocations occur. In the current climate of higher interest rates and tighter monetary policy (and more conservative credit parameters from banking partners), many mid-market managers are expanding into international markets, both for capital raising and investment activities.

Several trends are driving this shift: or, rather, this shift is bringing some trends to the surface.

Diversification.

The recent prolonged period of low interest rates created tremendous liquidity and left investors and funds with excess capital to deploy. Investments in private assets with longer durations and less liquidity became popular for their higher returns and low correlation to other assets. The groundswell of growth in this asset class has delivered us a ‘generation’ of fund managers who have become seasoned in these new approaches and strategies.

While this has been a slow build, it is a ‘gradually then suddenly’ scenario;¹ there is an unprecedented amount of private capital in the market and allocations to these strategies continue to accelerate,

International diversification broadens the range of investment opportunities available to managers and with it, the potential for outperformance. At the same time, it involves new potential risks, with foreign exchange risk at the top of the list.

Growth in alternative funds.

Macroeconomic factors and regulatory changes have impacted risk appetites at many financial institutions, and private investors have stepped in to bridge that gap and meet market demand for capital.

Banks’ current stance of tighter credit standards and conservative business policy has in many ways opened the door to more mid-market investors with relevant domain expertise. Specialized funds have arisen to serve almost every area of the financial markets and are capturing market share based on their flexibility, speed and ability to get deals done.

Private capital / private debt.

As banks and other institutions reposition themselves to reflect a more conservative risk appetite, credit lines tighten and traditional funding available to the mid-market shrinks. Private capital is filling that void, and providing debt and other financial solutions to a greater share of small- and mid-cap companies. We note that even pension funds and other large institutional investors who have been quite vocal in recent years about hedge fund fees, continue to increase their allocations to private debt strategies.

While much of the focus relates to activities in North America, the surge of interest is happening globally, across every tier of investor from individual retail investors all the way up to the largest institutional funds.

Longer holds.

Another trend that has been well documented is how elevated valuations and a cool IPO market has suppressed exit activity and led to many private equity investments being held longer. The committed capital available to PE funds is finite, but many portfolio companies require ongoing investment for growth initiatives and other corporate activities. This has created a significant need in the market for additional sources of funding.

This is manifesting in two different ways: NAV² lending, where funds obtain specialized credit facilities that are secured by their underlying portfolio investments, and secondary transactions, where a PE fund that is constrained by either time or liquidity sells a portfolio asset to another PE fund or specialty investment vehicle. While these two approaches are slightly different, both have been growing at a very rapid pace and have given rise to scores of new providers in each area.

Cleantech/impact investment.

In response to growing institutional interest in promoting sustainability and responsible investment, there are more funds being raised in this area. However it is still a relatively small investment sector within the context of the broader market. Outside of a few specific areas like power infrastructure, the investments we are seeing are generally being made into smaller targets. It is still a young industry that will continue to grow over time.

Smaller funds, startup funds and first-time fund managers, have had a more difficult time raising significant amounts of capital, especially over the last 12 or 18 months. When you think about how these funds are looking to compete in the marketplace they are not going to be looking at the same opportunities as a $10 billion fund, they are going to be focused on specialized strategies in relatively niche areas.

Cleantech and impact investment strategies fit well within this vertical. They are specialized and benefit from a secular tailwind, but the market is not yet big enough to attract the mega funds that populate the modern buyout landscape. It would be very difficult to deploy a $10 billion fund into an authentic cleantech or impact strategy today. And while there are smaller managers with the track record and market pedigree to be successful in raising new funds under such a mandate, the numbers don’t yet make a dent in the overall industry figures.

The times are changing, and, in many cases, global funds and institutional professionals are at the forefront of change in the financial markets.

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About Corpay Institutional

Corpay Cross-Border’s Institutional team supports practitioners across the spectrum of the international funds and institutional sector, providing a portfolio of foreign exchange, global payments and currency risk management solutions tailored to their unique needs.

The team operates from institutional FX desks based in London, Toronto, and Sydney, with local professionals working with institutional customers from branches in Jersey, Madrid, Dublin, Rome, Los Angeles, New York, Singapore, and other key financial hubs around the world.