Consolidation needed as alternative assets on track to hit $23 billion in four years

The alternative asset industry needs to embrace consolidation and industrialization as it pushes deeper into the retail market thanks to record capital inflows.

That’s the view of Sienna Investment Managers chief Pedro-Antonio Arias, who believes consolidation will help retail investors navigate the market. He pointed out that investors would not have to rely on many smaller players who focus on institutional investors, or would be forced to choose between one of the two big providers if smaller players joined forces.

“This consolidation among smaller players cannot happen at the same rate for all alternative assets,” he added. “Private debt and real assets players will consolidate first, but private equity is characterized by the common owner/manager model and closed-end funds, which will make integration difficult and mean consolidation will take more time.”

He also said that European players can leverage their existing distribution playbook to ensure alternative investment products are fit for purpose.

“We believe that European players are best placed to benefit from the “retailisation” of alternative markets. The timing couldn’t be better: Europe has the largest savings market in the world, with over €7,000,000,000.

Private capital growth

His comments were published alongside the data provider Preqin’s Annual Alternatives report.

Preqin expects private fixed assets to grow at a rate of 14.8% and reach $17.77 billion in 2026. This will make up the bulk of the $23.2 billion in assets the alternatives are expected to reach .

Within this framework, private equity is expected to amass $11.12 billion in assets by 2026. The recent increase in industry activity has resulted in total deal value of $804 billion on an annualized basis for 2021, up 70% from 2019. Meanwhile, low interest rates pushed investors into the asset class, increasing allocations.

Global private equity funds tracked by Preqin provided a net initial rate of return (IRR) of 18.8% over the five years to March 2021, the report noted. And high yields should continue to push assets under management higher.

While there are plenty of tailwinds, given the growing risks on the horizon, there could also be further deterioration in the outlook, the report’s authors noted.

“Investors have their attention firmly fixed on inflation, which is being fueled by excessive stimulus and ongoing supply chain disruptions.

“While some of these inflationary pressures will prove to be transitory, it seems increasingly likely that some will also persist, in which case long-term interest rates are likely to rise, undermining financial markets’ willingness to maintain current valuations. If that happens, it could end the market cycle that has been in play since the end of the global financial crisis,” they wrote.

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