Top 5 Investment Trends in Alternatives 2022.pdf

Investor interest in alternatives rapidly expanded in the second half of 2021.  As we commence 2022, we outline five trends relevant to investors in alternatives for the new year.

1. Greater volatility in traditional assets in a slower growing economy

2022 is likely to see greater market volatility across traditional assets, particularly listed equities and wholesale bonds as has already been seen in the first couple of weeks of the new year. 

Interest rates must come off their emergency record lows given the inflationary effects widely reported across business supply chains and with upward pressure to wages likely to follow.  We would expect growth rates to be slower.  Whilst Australia does appear it could be one of the later developed countries to make rates moves, pressure is likely to grow throughout the year. 

Investors should be willing to accept generally lower equity market returns over the next couple of years but higher levels of single stock dispersion as the stimulus unwinds. 

Alternatives will add increasing value to investors with private markets providing differentiated exposure that are not subject to daily liquidity flows distorting their asset prices.

All potential alternatives need to be analysed for their underlying risks to inflationary forces, however alternatives generally can be far less correlated to cash rate movements.

 2. Increasing number of investors and levels of activity
The greater volatility in traditional asset classes will also assist the increased pick-up seen in alternatives participation through the second half of 2021 continue throughout 2022.

Weightings towards alternatives across balanced portfolios are increasing, as self-directed investors and their advisors trim holdings that have increased in daily volatility. 

The number of wholesale accredited investors across Australia and New Zealand has also increased substantially in the last two years as a percentage of investor population, greatly assisted by asset price appreciation in their real estate assets.

3. Greater understandings of breadth 

With access to alternatives having improved for self-directed and private advised investors, 2022 will see those investors and their advisers seeking greater levels of portfolio diversification across the sub-sectors in alternatives.

An increasing understanding of the differentiated sub-sectors include alternatives focused managed funds, direct private equity, direct private debt, property debt and equity, as well as agricultural land aggregation. 

Understanding the lower and in some instances no correlations between sub-sectors will play an important education role. 

4. Diversification strategies re-written with real assets in focus

Traditional asset allocation models are likely to be under pressure as that stimulus unwind occurs. 

With single stock differentiation increasingly important in equity holdings, stocks and bonds have previously and will show again that they can move in tandem. 

Private investor portfolios which have traditionally been heavily overweight domestic equities and direct property will be reassessed.  Alternatives are positioning to benefit from the portfolio shifts.  
A focus will be on real assets to provide a level of stability and some inflation protection for investors.

Areas of direct property exposure that are associated with higher levels of leverage could come under price pressure and should be avoided. 

Real assets in alternatives can come as a variety of different exposures, including equipment, buildings, land and contracted cash flows.

5. Funding growing businesses that are transitioning

Activity across private debt and equity capital raisings will be supported by private businesses that are consistently seeking capital through their early stages of growth. 

Most of these businesses are not yet of the scale required for larger warehouse funding for their debt capital, but they are transitioning towards lower costs of funding as they grow. 

Many private companies are choosing to stay private for longer, providing opportunities for private investors to play an increasingly important role to provide debt and equity capital at multiple intervals.  Being nimble and able to do smaller deals in a timely manner will be important to access quality risk and reward opportunities. 

The success being seen in fintech organisations, as well as scalable technology platform businesses that are solving real consumer needs across a variety of sectors will drive the activity.

Disclaimer:

This report provides general information and is not intended to be an investment research report. Any views or opinions expressed are solely those of the author. They do not represent financial advice. This report has been prepared without taking into account your objectives, financial situation, knowledge, experience or needs. It is not to be construed as a solicitation or an offer to buy or sell any securities or financial instruments. Or as a recommendation

and/or investment advice. Before acting on the information in this report, you should consider the appropriateness and suitability of the information to your own objectives, financial situation and needs. And, if necessary, seek appropriate professional or financial advice, including tax and legal advice.