Alternative assets are set to boom in the coming five years, growing 60% in total to reach $17.16 trillion in outstanding valuations at the end of 2025, from $10.7 billion at the end of 2020, predicts Preqin.

And Asia Pacific demand is set to constitute a key part of this rapid growth, courtesy of the region’s rapidly growing asset pile said the alternative asset data provider in a new report, titled The Future of Alternatives 2025.

Preqin noted that “AUM in the region is set to increase from $1.62 trillion to $4.97 trillion over the next five years,” or a compound annual growth rate (CAGR) of 25.2%, which helps to underpin this voracious growth in demand.

Alternative assets are typically defined as a mixture of private equity, private debt, real estate and hedge funds. Signs of rapid growth in the asset classes are abundant. Virtually every asset owner AsianInvestor speaks to expresses a desire to gain more alternative asset exposure, and some – such as some Korean pension funds – have already expanded their alternative assets to 40% to 50% of their portfolios.

However, most regional investors have allocations of only 5% or so, and it would be easy to imagine them expanding this to 15% or more. One example is Korea's National Pension Service, the third-largest retirement fund in the world with $625 billion in AUM, which wants to raise its alternatives allocation to 13% of its portfolio by 2013, from 10% last year. In October it signed an alliance with the Netherlands' APG Asset Management to help achieve this goal.  

While the opportunity for growth in Asia will tempt many specialist alternative fund managers, North America is set to remain the largest overall holder of assets; Preqin predicts the continent to possess $8.6 trillion by 2025. In contrast Europe will see a more modest increase in alternative asset AUM, from $2.21 trillion in 2019 to $2.83 trillion in 2025.

PRODUCT APPEAL

The appeal of these typically illiquid assets, which institutional investors tend to access via specialist general partners or through direct investments, has only been underlined over the past year as the Covid-19 pandemic has spread, argues Preqin.

“Just as was the case during the Global Financial Crisis (of 2008 and 2009), alternative assets are proving to be highly resilient to the disruption of Covid, and an attractive and growing destination for LPs’ capital. Allocations will continue to grow, and with them so too will our industry,” said Mark O’Hare, chief executive of Preqin, in the report.

The research company anticipates that private equity will enjoy by far the most rapid growth of the alternative asset classes, solidifying its existing market dominance. Preqin predicts global private equity assets under management (AUM) will grow from an estimated $4.41 trillion at the end of this year to $9.11 trillion in five years’ time; a CAGR of 15.6%. At that point it will account for 53% of global alternatives AUM.

Private debt is also set to enjoy rapid growth, says Preqin, expanding 11.4% annually from $848 billion at the end of 2020 to reach $1.46 trillion at the end of 2025.

In contrast, Preqin believes real estate and hedge funds will grow at much more modest rates. It anticipates property assets will expand from $1.05 trillion this year to $1.24 trillion in 2025, while hedge fund total AUM will grow from $3.58 trillion to $4.28 trillion over the same period.

These slower growth rates reflect in part the greater difficulties both asset classes have encountered. Real estate has traditionally been a popular store of value but the coronavirus has hammered valuations and yields over the past year as economic activity has been curtailed, and left questions hanging over the longer term value of prime commercial real estate.

Meanwhile hedge funds have never fully recovered from underperforming during the global financial crisis, and look set to remain a niche investment class.