Adaptability has long been a key skill for managers in the global alternatives funds space. In recent years, volatile market conditions, shifting investor appetite, regulatory change and geopolitics have all required fund managers to demonstrate that they are adept at adjusting their sails.

But 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 and at pace, as the industry looks to be entering a period of substantial change and transition. 

It’s something that is explored in a report recently published by Jersey Finance in partnership with IFI Global. This 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. The report explores how these changes are set to transform the hedge, private equity and wider alternative funds space over the coming years.

While the impact on managers is set to be significant, if they can grasp what these changes mean and take action, then there are some exciting opportunities on the horizon.

Investor diversification

At the heart of this change is the premise that asset raising is no longer as straightforward as it once was. After 15 years of growth, many 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, while 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. 

Bain’s Global Private Equity Report, for instance, finds individual investors control approximately 50% of the US$295tn in global AUM, yet account for only 16% of AUM managed by alternative investment managers. However, 53% plan to raise their allocations to the alternatives sector over the next three years.

There is clear mutual benefit for both managers and investors here – on the one hand, many private asset managers are needing to diversify their investor base away from their traditional reliance on large institutional investors; on the other, there is a growing desire amongst family offices and high-net worth investors to increase their allocations to private market assets.

There are challenges to this. Accessing alternatives can be opaque, cumbersome and costly. In addition, there is a reliance on advisors and relationships to source deals, and there can be challenging minimum investment levels for private and family office investors.

Thankfully, diversification is manifesting across the sector in other ways too, to help address these issues and move the dial further.

Structures and products

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

At a structuring level, there is significant evidence of a move over recent years from standard fund vehicles towards more innovative non-traditional entities, including corporate structures. This looks to be a long-term change in investment structuring in which managers have a different range of options available for investors, depending on what they are looking for. The days of relying upon traditional collective investment funds, for many managers, may be over.

In addition to standard pooled funds, many managers also now offer investors managed accounts, co-investments, funds of one and various other hybrid fund structures. With fees relating to managed accounts having come down considerably in recent years, it is estimated that up to three-quarters of financial advisors in the US could be using managed accounts in the coming years, according to research from Investment Trends and SPDR. Some private equity managers have also diversified into open-ended (3)(c) funds.

In tandem, the rise of blockchain technology and tokenisation is further transforming the market. Blockchain in particular is increasingly providing a way into alternatives and private markets for high-net worth investors. 

The application of tokenisation can help to break down existing barriers for investors – giving them improved liquidity, transparency and control over their allocations, but without the extra fees. This is particularly significant in high-value investments such as real estate, private equity and infrastructure. Real assets backed by blockchain technology can be securely traded, tracked and owned, and can greatly aid liquidity and transparency, whilst also substantially reducing minimum investment levels. 

In structuring terms, tokenisation can, dependent on the jurisdiction, be treated as corporate securitisation structures, rather than pure fund structures, reinforcing the trend in the move away from standard fund vehicles towards more innovative structuring frameworks.

There are still hurdles to overcome. Regulatory uncertainty is still perceived to be a major obstacle – according to EY Parthenon, 24% of high-net worth investors identify regulatory uncertainty as a significant challenge, for instance.

Nevertheless, tokenisation’s impact on the alternative and private markets stands to be transformative - total tokenised market capitalisation is forecast to reach around US$2 trillion by 2030 (McKinsey, 2024). At the same time, high-net worth investors anticipate allocating an average of 8.6% of their portfolios to tokenised assets by the end of 2026, and plan to allocate a greater portion of their portfolios to these assets than institutional investors do (EY Parthenon, 2023). 

The potential for managers here is clear.

On the product front, meanwhile, strategy diversification is having an increasing influence. It is likely that the strategies that have led private capital markets in the past, such as private equity, will not be as dominant in future. 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. This 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. The 2024 Natixis Private Assets Report, which surveyed 500 institutions worldwide, found that the sustainable sector is now the biggest opportunity in private markets, and it is likely that, as the sustainable sectors grow, each will become a recognised category in its own right. The renewable sector is often already categorised this way, and biodiversity/nature will likely become so too. Other sustainable sectors could well also follow.

Reconfigure

The major changes shaping the alternatives landscape 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. 

Diversification in investor audience, in structuring and in product offering are, although distinct and separate trends, coming together and intertwined, to reconfigure the alternatives environment.

This has clear ramifications for managers, who must ensure they are ahead of the curve in having the right tools, skills and strategy to seize the opportunities that this new era of alternatives can offer. Domiciles too will need to provide the certainty, digital environment and progressive regulatory frameworks managers require to meet investor needs.

Combined, these changes appear seismic. And – collectively - they are but, at the same time, at the mid-point of this decade, the outlook for alternatives has never looked more promising. 

The trends shaping the sector mean that, over the coming years, intrepid managers will be able to bring new products to market like never before, giving private investors the wider choice of strategies and structures they crave - in so doing creating new capital growth opportunities, facilitating wealth creation, and driving change in ways that simply do not - currently - exist.