Emerging Trends in Alternatives

Lana Callahan, Managing Director – Investor Relations at Apex Invest (part of Apex Group)

2023 has been a tricky year for investors. Rising interest rates, macroeconomic uncertainty, banking collapses and redundancies in Silicon Valley have all spooked investors and fed into market volatility. These conditions have introduced new hurdles for both Limited Partners (LPs) seeking to invest capital and the fund managers striving to raise and deploy funds effectively.

2023 has seen institutional investors over-allocating to alternatives which now constrains their ability to commit fresh capital. Consequently, these investors have become more discerning, narrowing their focus on established manager relationships, typically those with proven track records. This shift towards favouring managers with significant Assets under Management (AuM) and a strong history of performance—the so called ‘flight to familiarity’ – has allowed well-established General Partners (GPs) to meet their fundraising targets, even in the face of market uncertainties. For smaller and emerging managers however, the flight to familiarity has meant prolonged fundraising timelines, delayed launches, and adjustments to target fund sizes.

For alternatives then, attracting funding has proven more difficult in 2023 and the data bears this out. Analysis from S&P Global Market Intelligence and Preqin shows that private equity funds amassed $444.65 billion in the first half of 2023, a 20.5% decline compared to the $559.02 billion raised in the first half of 2022.  As we enter the second half of 2023, it is likely this trend will continue as macroeconomic conditions continue to dampen risk appetites.

What other themes have we seen emerging in 2023?

The latter part of 2022 witnessed a notable surge of interest in private debt, a trend that has remained appealing through mid-2023. Pitchbook data shows that in terms of share of capital raised in the first six months of 2023, private debt funds took a record 19.7%, up from 15.6% in 2022. Given the limitations in public market financing and caution amongst bank lenders, borrowers have increasingly turned to private markets for flexible terms and structures. Additionally, distressed and special situation strategies are gaining prominence as difficult business conditions take their toll, and opportunities arise to acquire distressed enterprises.

In parallel, Real Asset and Infrastructure strategies are gaining traction as LPs seek returns that are uncorrelated with the current market volatility and sticky inflation. Similarly, specialized funds targeting healthcare verticals, tech, and AI-enabled businesses are attracting substantial flows of capital.

Meanwhile, the flight to familiarity trend is evident among allocators showing interest in open-ended vehicles like hedge funds. There has been a resurgence in traditional long/short, long only and fixed income strategies, driven by investors seeking comfort in the familiar. In contrast, interest in digital assets, as well as Commodity Trading Advisors (CTAs) and commodities, remains relatively subdued among institutional investors.

Co-Investment Strategies

Given the challenging macroeconomic landscape, co-investment strategies are emerging as a popular approach for LPs and GPs alike. In the first quarter of 2023, the value of private equity co-investments involving sovereign wealth funds, pension funds, corporate investors, and family offices surged by nearly 39% year-over-year to $42.3 billion, as reported by S&P Global Market Intelligence.

Amid ongoing difficulties in deal flow and fundraising, co-investment opportunities offer an attractive solution. During times of squeezed returns, the lower fees associated with co-investment vehicles empower LPs to generate enhanced returns while maintaining greater control over their investment portfolios. LPs are also drawn to the higher risk management levels associated with co-investments, which often involve rigorous due diligence. As a result, LPs are looking not just to build relationships with GPs but are also seeking forums to strengthen their network within the LP community as they seek potential co-investment partners.

Importantly, the appeal of co-investments extends to GPs as well. Such strategies provide access to capital for deals when traditional fundraising is sluggish, and financial resources are scarce—particularly amid concerns of a potential credit crunch and limited bank lending.

Hybrid Fundraising Approach

Interestingly, the focus isn’t solely on where capital is being allocated, but also on how funds are being raised in the post-pandemic landscape. While the industry rapidly shifted to digital fundraising tactics during the 2020-2022 period, the idea of a complete “death of in-person fundraising” post-pandemic has proven exaggerated.

Our own Apex Invest offering is testament to this. While technology such as the apexinvest.io platform has opened new opportunities for fundraising, the human touch still matters and Apex Invest has had huge interest in its conference program and has been used by over 2,300 allocators and more than 1,500 funds, with 87% of allocators reporting allocating $45bn+ of funds via the platform.

There’s a growing appetite for high-quality in-person events. However, amidst prevailing economic headwinds, costs remain an issue and expenses related to conferences, events, or in-person meetings must demonstrate intentional and substantial value.

For new and emerging fund managers, in-person fundraising remains crucial. According to Pitchbook, only 160 first time funds were raised in the first half of 2023 totalling just $22.3bn, down from 740 raising $59.2bn in 2022. If there’s one way for emerging managers to beat the flight to familiarity, it’s to themselves become familiar, by forging strong personal connections with LPs through face-to-face interactions.

What next?

We anticipate an easing of conditions through the second half of 2023. 2023 has been a year which has lent itself to caution thus far. But, with signs of economic recovery emerging and an easing in central bank rate rising programs, we expect an easier second half to the year.  LPs who have, until now, delayed fundraising will re-enter the market for a renewed allocation push in early 2024. Successful LPs and GPs will need to adapt to evolving market conditions and adopt a streamlined approach to allocation and fundraising, leveraging both online and in-person platforms.