Allocations to alternative asset classes have been on the rise; a trend that began in the aftermath of the global financial crisis, driven by investors’ need to diversify and seek alpha.
In more recent times, investors have been increasingly nervous about the course of equity markets and constantly evaluating their asset allocation strategies as a result.
Those increasing their allocation to alternative asset classes include institutional investors, especially pension funds, as well as family offices and ‘qualified investors’.
Kavitha Ramachandran, senior manager, business development & client management at financial consultancy Maitland, explores what this means for investors and service providers.
Which asset classes are affected?
Private equity and real estate have traditionally topped alternative asset class allocations.
But the past few years have seen the emergence of private debt as a popular asset class with a significant increase in the number of debt-focused funds.
A recent survey by the Luxembourg Fund Association, ALFI and KPMG reveals that, as at mid-2018, assets under management of Luxembourg loan funds had grown by 23.5% on the mid-2017 figure.
This is a significant increase, year-on-year, considering that the rise in this asset class matched increases in private equity and real estate, and in a relatively short time.
The pace of growth has been set by initiatives like the EU’s Capital Markets Union, strengthening the case for alternative lending strategies, SME lending and the emergence of alternate financing.
The popularity of non-performing loans (NPLs) in fund portfolios and securitised vehicles adds flavour to the asset class. Additionally, regulators have worked hard in streamlining NPLs.
Following in the footsteps of debt fund strategies, the increase in popularity of another asset class in fund structures is trade finance and supply chain finance with more managers setting up fund structures to provide access to institutional and high-net-worth investors.
Impact on service providers
As the market drives managers to refine investing in existing and new asset classes, such as the trend towards debt funds, this has an impact on service providers like management companies and administrators.
These asset classes give rise to a new dynamic of services like loan servicing, loan administration, trade finance and supply chain activities.
While the trend so far has been for fund managers to provide these services themselves, there is an increasing trend of managers looking to their service provider, especially the fund administrator, to provide such services so that they can concentrate on their core activity of asset selection.
For service providers, this brings both opportunities and challenges, for example in ensuring that they have the necessary skillset and resources.
The opportunities – and challenges – are only increasing with growing pressures from regulatory changes and political uncertainties like Brexit.
In keeping up with the trends in asset allocation and associated services, service providers need to continue reinventing themselves as they look to distinguish themselves and support managers by way of upskilling, providing value-add services and investing in automation and digitalisation.
