Investors turn to alternative assets as yields fall

Ardian's Dominique Senequier

Ardian’s Dominique Senequier says low rates are driving investors into rates are driving more investors into private equity, infrastructure and real estate in the hunt for yield

A preferred tactic is emerging: targeting alternative assets.

Simon Smiles, chief investment officer for ultra-high net worth at UBS Wealth Management, which manages around $ 2 trillion in assets, said: “Negative rates are encouraging investors to go further afield.”

Among his firm’s clients, he said, that means increased interest in alternative investments, such as private equity, real estate, infrastructure, private debt and hedge funds.

Greater interest in alternatives is also seen in the results of a recent survey by Bank of New York Mellon. More than one-third of investors surveyed said they would increase allocations to alternative investments; six percent said they would slightly decrease it.

In September, UBS said that family offices globally increased their allocations to private equity and real estate in 2016. The family offices increased their holdings of private-equity investments by 2.3 percentage points to 22.1% and their direct real-estate holdings by 0.2 percentage points to 11.5%.

Private debt and infrastructure markets are another area grabbing investors’ attention. French lender Natixis is looking to raise $ 1 billion to invest in debt backed by real estate, infrastructure debt and airplanes around the world.

Like government and corporate bonds, loans on these assets can provide predictable cash flows, says Laurent Belouze, head of private-debt real assets at the bank.

Dominique Senequier, the founder of Ardian, a Paris-based manager of private-equity and infrastructure funds, says current rates are driving more investors into private equity and also into infrastructure and real estate, where they can receive annual yields.

Ardian’s investors include sovereign-wealth funds, pension funds and insurance companies seeking to boost returns. The French firm is currently raising its first real-estate fund, following in the footsteps of US private-equity giants Blackstone Group, Carlyle Group and KKR, which are also managers of large real-estate funds.

Sovereign-wealth funds are increasing their exposure to private equity and real estate, according to research company Preqin. Some 55% of sovereign-wealth funds are investing in private equity in 2016, up from 47% in 2015, while 62% are investing in real estate, up from 59%, according to Preqin. By contrast, the percentage of sovereign-wealth funds investing in fixed income declined to 82% this year from 86% last year.

Hedge funds, meanwhile, which collectively manage almost $ 3 trillion globally, are struggling to come to terms with the low and negative rate environment. Many are finding it difficult to post superior returns, which makes it difficult to justify the high fees management charges.

Investors withdrew a net $ 23.3 billion from hedge funds in the first half of this year, according to Hedge Fund Research. That puts the industry on track for its first year of outflows since 2009.

Low bond yields have also pushed investor money into stocks, which hedge funds find challenging in today’s volatile markets. Many actively pick stocks and have been unsettled by huge flows of money that, by contrast, often fail to discriminate between good and bad companies.

James Inglis-Jones, fund manager at Liontrust Asset Management, said: “The negative-interest-rate environment has created a more challenging backdrop for hedge funds.”

When stocks largely move in the same direction, as they have lately, he added, it can be harder for managers to beat their market benchmarks. Betting on falling stock prices, meanwhile, a process known as shorting, has become more expensive due to zero or negative interest rates, he says. Hedge funds borrow stocks to sell, but now earn no interest on the cash they receive, he explains.

Problems in the hedge-fund industry are contributing to a massive flow of money into private equity, which could cause excess competition and lower returns, says Simon Borrows, chief executive of 3i Group, a London-based private-equity firm. The squeeze on private-equity returns could result as the inflows chase the same opportunities, making it tougher to outperform.

In 2015, private-equity firms world-wide had a record $ 1.3 trillion of “dry powder” – a term that means the amount of money available to invest – according to Bain & Co.

The dry powder build-up, Borrows says, “could leave investors with problematic outcomes including disappointing returns”.

This story was first published by The Wall Street Journal

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