Diversification will Present Managers with Significant Opportunities

Growth in alternative investments is currently challenging but major changes shaping the private markets mean asset managers will be able to bring new products to market “like never before” in the coming years, says Elliot Refson of Jersey Finance.

Being able to adapt has long been a hallmark of the cross-border funds industry. From volatile market conditions and shifting investor appetite to regulatory change and the impact of geopolitics – asset managers have learned to adjust their sails as needed.

But that change has, by and large, been incremental, rather than seismic. Now, the established norms in the global alternative and private investment sector are being challenged like never before – on multiple fronts – something that is explored in a white paper Jersey Finance recently published in partnership with IFI Global.

It sets out how a number of largely unrelated factors are coming together to create a period of intense change – change that is manifested through investor diversification, product diversification and structural diversification, that is set to transform the private investment sector over the coming years.

New audiences

After 15 years of growth, many asset managers in the alternative investment sector are currently facing more challenging conditions than they are accustomed to. Many institutional investors, such as pension funds, have reached their target allocation thresholds for the sector, whilst the end of the once booming IPO market is also contributing to the challenging picture.

This environment has prompted many managers to diversify away from their traditional institutional investor base and look to new audiences – including family offices and the broader high-net worth market, who remain under-allocated to the sector. Research from JP Morgan & Bain at the end of 2022, for example, found that just 5% of the high-net worth investor market had allocations to alternatives – but that 53% plan to raise their allocations to this sector over the next three years.

There are challenges to this. Accessing alternatives can be opaque, cumbersome and costly, for instance – but other significant changes in the sector are addressing these issues.

Products and structures

Acceleration in the creation of new products and adoption of new structures is enabling managers to cast their net wider.

In addition to standard pooled funds, many managers now offer investors managed accounts, co-investments, funds of one and various other hybrid fund structures. Some private equity managers in the US have also diversified into open-ended (3)(c) funds.

Managed accounts have become particularly popular mechanisms for managers of private capital who are looking to open up their funds to a wider audience of investors, with fees relating to managed accounts having come down considerably in recent years.

How much structures have changed over the last five years is illustrated by what has occurred in Jersey. Jersey is one of the leading domiciles for alternative investment structures and has continued to grow as a jurisdiction for these entities over this period of time. Their recent growth, however, has come primarily from non-traditional entities, rather than from standard funds. This looks to be a long-term change in investment structuring in which managers have a different range of options available for investors, depending upon what they are looking for.

In tandem, the rise of blockchain technology and tokenization is further transforming the market, providing a way into alternatives and private markets for high-net worth investors. Real assets backed by blockchain technology can be securely traded, tracked and owned, and can greatly aid liquidity and transparency, as well as very substantially reducing minimum investment levels.

In addition, the application of tokenization is set to revolutionize access to alternatives – giving investors improved liquidity, transparency and control over their allocations, but without extra fees. This is particularly significant in high-value investments such as real estate, private equity and infrastructure.

There are still hurdles to overcome – regulatory uncertainty, for instance, is still perceived to be a major obstacle. Nevertheless, tokenization’s impact on private markets could be transformative – total tokenized market capitalization, for instance, is forecast to reach around $2 trillion by 2030 (McKinsey, 2024).

On the product front, meanwhile, private credit and sustainable investing are projected to come much more to prominence than they have done to date, over the next few years. Private credit assets are continuing to grow, having now surpassed the US$2 trillion mark, against a backdrop of higher rates and a slower private equity deal environment. The asset class is expanding into new areas, including a wide variety of asset-based financing structures.

Meanwhile, sustainable investment is booming – but what is happening is partly going undetected. That is because the private assets industry hasn’t yet got the right tools to measure what is going on. Sustainable investing is still too often wrapped up with ESG and retail mutual fund issues. Equally, much of the investment that is going into the renewable energy sector—a large part of sustainable investing—is being counted in the infrastructure category.

Promising outlook

The major changes shaping the private markets suggest that, over the coming years, managers will be able to bring new products to market like never before, whilst investors will have a wider choice of strategies and structures available to them.

In Jersey, we are well placed to support this transition to a new era in cross-border funds. Agile in the face of change, with a renowned regulatory framework and a broad range of vehicles, Jersey is already supporting innovative digital asset and tokenised strategies, and is committed to this transformational journey for the industry.

Overall, the outlook for the industry has never looked more promising – and progressive centres like Jersey will be pivotal in helping managers and investors to manage this period of change and enable the industry to realise its potential.

This article was originally published on Funds Europe.