Private equity, real estate and infrastructure managers anticipate strong growth in assets in the next five years, according to new research from BNY Mellon, a global leader in investment management and investment services.
The report, Building for the future: How alternative investment managers are rising to the demographic challenge, was prepared in collaboration with Preqin, the alternative asset industry's leading source of data and intelligence. It surveyed 340 private equity, real estate and infrastructure fund managers globally.
Global macro-economic, social and environmental shifts are fuelling a need for investments in real assets, property and infrastructure worldwide. The report forecasts that appetite for these assets among retail and institutional investors will continue to grow. Sixty percent of infrastructure managers, 44% of real estate managers and 39% of private equity managers surveyed expect their assets under management to grow by at least 50% in the next five years.
"Deep-rooted demographic and macro forces are driving an unprecedented need for investment in real assets such as transport facilities, communications networks, housing and hospitals. These demands far outstrip the reach of government and public finances, and this creates huge opportunities for private capital to play a part in people's everyday lives," said Alan Flanagan, global head of Private Equity and Real Estate Fund Services at BNY Mellon.
While institutional investors, most notably pension funds and family offices, currently demonstrate the biggest appetite for real investments, almost half of the private equity and real estate fund managers surveyed believe that retail investors will account for a higher level of capital inflows by 2020 than they do today. Investment will come from mass affluent and high net worth individuals in developing markets, the continued expansion of sovereign wealth funds, and increasing numbers of defined contribution schemes.
"Investors are turning more and more to real assets to find yield, diversify their portfolios, and steer through volatile markets," said Flanagan. "The growth in real asset investments has been impressive and there is no sign of it slowing down. As a result, the marketplace has become increasingly competitive on deal sourcing, presenting challenges for managers to successfully deploy the capital they have raised."
The majority of alternative investment managers surveyed have seen institutional investor appetite for real assets climb over the last 12 months. A third of real estate and 41% of infrastructure managers are seeing the most demand coming from public pension funds, followed by private sector pension funds. Private equity managers see the greatest interest coming from family offices, followed by public pension funds (26% and 25% respectively). The survey also revealed that more than a third of infrastructure and real estate fund managers had altered their investment approach, either by diversifying their assets or exploring different geographies and niche strategies.
The need for transparency, driven by clients and regulators, is prompting a growing number of managers to consider outsourcing certain functions. Overall, two-thirds of fund managers across all asset classes feel regulation might lead to outsourcing in the future. Cost was the most commonly stated reason to outsource, in addition to having access to enriched data and analytics from an outsourcing provider and access to the expertise of external staff.
"Investment managers' business models must have flexibility to thrive in such a fast-evolving environment and also be able to meet growing regulatory reporting as well as institutional investor demands for transparency," added Flanagan. "To maintain strong allocations and achieve sustainable growth, it's vital that managers of assets are invested in their infrastructure and supported by the right operating models."
BNY Mellon is a leading administrator of alternative assets – including single manager hedge funds, funds of hedge funds, and private equity – with more than $750 billion of alternative assets under administration and/or custody and offices worldwide. BNY Mellon also offers a wide range of cash management, foreign exchange, collateral management, corporate trust, and wealth management services to the alternative investments industry.