With moderate growth predicted over the coming year, a volatile geopolitical climate, and rising trade tensions in many economies, institutional investors are increasingly seeking investments that shelter their capital from short-term risks and market movements while also generating strong returns.
In the years since the financial crisis, alternative assets, such as private equity, real estate, infrastructure, private debt and, to a lesser extent, hedge funds, have largely offered this kind of shelter as investors have allocated increasing proportions of their assets under management to this area of the investment market.
Against this backdrop, we surveyed some of the most sophisticated investors on the planet – Canadian institutional investors – to gain insights into their current alternatives exposure and future plans. Taking an active approach to managing their portfolios, Canadian investors have been at the forefront of the shift towards alternatives: some of them have been in alternatives for decades, while others have moved up the experience curve rapidly by building dedicated professional alternative asset management teams.
An earlier global survey of institutions investing in alternatives, The Race for Assets, undertaken by BNY Mellon, provides a counterpoint for the results of our Canadian survey. It found that just over half of investors (53%) were seeking to increase their allocations to alternative assets over the coming 12 months and 12% expecting to decrease their exposure. The Race for Assets: Canada survey highlights an even stronger appetite among Canadian investors, with a higher proportion (58%) expecting increased allocations to alternatives over the next 12 months, and no respondents expecting to reduce their exposure. Real estate currently accounts for the largest proportion of Canadian investors’ exposure (versus private equity globally). As we move through 2019, greater diversification across alternative asset classes and by region are trends to watch out for.
What do you predict will happen with allocation volumes in the alternatives market among Canadian investors over the next 12 months?
Our report demonstrates that Canada’s investors have a tremendous capacity for innovation. A large proportion invest via funds of funds – often an entry point to new investment areas and a means of pooling smaller resources. Yet a similar proportion have also taken a different tack: partnering with other investors to invest in funds and making direct investments, both of which can improve the economics of investing in alternatives. These routes are far more common among Canadian investors than the well-trodden path of investing in traditional fund structures. The move towards direct investing is also evident among investors globally – the BNY Mellon survey found that 55% of respondents are looking to increase their direct investment activity.
Perhaps unsurprisingly, we also reveal that satisfaction with returns from alternatives remains high, although Canadian investors continue to agitate for change. Throughout our conversations across the alternatives industry – with Asset Owners and private fund managers – we hear the same three themes: reducing fees, increasing transparency and elevating sustainability factors are the three key areas where Canada’s institutions will focus their efforts over the next 12 months in their dealings with fund managers.
Nevertheless, Canada’s investors, with their long-term focus and strong in-house resources, look increasingly set to forge their own alternatives paths. Two-thirds already invest directly into portfolio companies and infrastructure assets and over half are looking to increase their direct investment activity, giving them greater control over their investment allocations.
Canadian institutions are already among the world’s most admired and influential. As our report shows, they look set to retain that status in the years to come.