Navigating the Alternative Assets Industry for Enhanced Returns

The alternative assets industry offers a world of possibilities for investors looking to diversify their portfolios and potentially boost returns. This sector includes assets such as private equity, hedge funds, and real assets.

Investors can tap into alternative assets to gain exposure to unique investment opportunities that may not be available in traditional markets. Alternative assets often have lower correlations with traditional assets, which can help reduce overall portfolio risk.

One key benefit of alternative assets is their potential for higher returns than traditional assets. For example, private equity investments have historically outperformed public equity investments.

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The alternative assets industry has experienced tremendous growth over the past 16 years, with a 400% increase in assets under management, from USD 3 trillion in 2003 to USD 15 trillion in 2019.

This growth is expected to continue, with a projected USD 18 trillion in assets under management by 2024.

The industry's revenue has also seen a significant increase, with alternative assets now accounting for 46% of the total revenue from all asset classes, up from 29% in 2003.

By 2024, the revenue from alternative assets is projected to reach USD 162 billion, a substantial increase from the estimated USD 30 billion in 2003.

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The alternative assets industry can be broken down into several core asset classes.

Private Equity is one of the primary asset classes, with an investment cycle that can last anywhere from 1 to 10 years.

Hedge Funds are another major asset class, with a trade cycle as short as 1 year.

Real Estate and Private Debt are also significant asset classes, offering unique investment opportunities.

Infrastructure, energy, and even art are other exotic investments that fall under the alternative assets umbrella.

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Investments come in many forms, but did you know that there's no one-size-fits-all definition of alternative investments? In fact, different firms might categorize the same asset class differently.

Alternative investments typically include asset classes like private equity, hedge funds, and commodities. These types of investments can be riskier and more complex than traditional investments.

Private equity, for example, includes venture capital, which is a type of investment that helps start-ups grow and succeed. Hedge funds, on the other hand, are investment vehicles that use a range of strategies to generate returns.

Here are some common alternative investment asset classes:

Alternative assets can be broadly categorized into four primary asset classes: Private Equity, Hedge Funds, Real Estate, and Private Debt. These asset classes offer distinct performance and opportunities.

Private Equity investments can last anywhere from 1 to 7-10 years, making them a long-term commitment. Hedge Funds, on the other hand, have a shorter investment cycle, typically ranging from 1 year.

Real Estate investments can provide a stable source of returns, but they also come with unique challenges, such as managing physical assets. Private Debt investments offer a relatively stable source of returns, but they also carry a higher level of risk.

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Infrastructure and energy investments are also part of the alternative asset landscape, offering opportunities for growth and diversification. However, they can also be more complex and require specialized knowledge to navigate.

Art and other exotic investments are also being explored as alternative assets, but they come with unique risks and challenges. It's essential to carefully consider these factors before investing in such assets.

The performance of alternative assets can be volatile, and it's crucial to have a well-diversified portfolio to manage risk. By understanding the different asset classes and their performance, investors can make more informed decisions and achieve their financial goals.

Investing in core asset classes can provide a stable foundation for your portfolio, but what about enhanced returns? Stocks, for example, have historically offered higher returns than bonds, with an average annual return of 10% over the past century.

One way to boost returns is to diversify across different asset classes, such as real estate, which can provide a steady income stream through rental properties.

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Real estate investment trusts (REITs) can offer a way to invest in real estate without directly managing properties, with many REITs providing a dividend yield of 4-6%.

Investing in emerging markets, such as those in Asia, can also offer higher returns due to their rapid economic growth and increasing demand for goods and services.

However, emerging markets can be riskier than developed markets, with higher volatility and potential for currency fluctuations.

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Determining fair-market valuation for private investments is a manual and subjective process.

It requires a specialized in-house valuation team or third-party vendor to manage the task.

Reporting is also a much more complicated task in the alternative assets industry.

Operations teams often need to dive back into paper deal documentation to obtain data requested or required by clients and regulators.

This can be a time-consuming process, especially in a manual, paper-based setting.

The operations team must also keep up with changes in reporting requirements by updating their data collection and reporting processes.

This requires significantly more work than in a more standardized, digital framework.

If firms could eliminate or even minimize these additional requirements, the overall cost structure would go down.

According to Broadridge's John Partenza, this would have a significant impact on the economics of an investment.

Determining the valuation of a private investment is a manual and subjective process that requires a specialized in-house valuation team or third-party vendor.

It's a far cry from the ease of logging onto a Bloomberg terminal to determine the valuation of a public investment.

Manual processes are not only time-consuming but also prone to errors, which can be costly in the alternative assets industry.

In a recent study, the most common operational challenges for alternative asset classes were identified, including determining valuation, reporting, and data collection.

These challenges can affect the economics of an investment, making it essential for firms to streamline their operations.

According to Broadridge's John Partenza, if firms could eliminate or minimize these additional requirements, "the overall cost structure would go down."

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Operations teams in the alternative assets industry are taking on a new responsibility: capturing and reporting environmental, social, and governance (ESG) information. This is because asset managers are asking for ESG information on deals and portfolios, and operations teams are being tasked with sourcing and monitoring this data.

In Europe, asset managers are already requesting expansive ESG information from deal teams. These deal teams are then turning to their operations partners for help in gathering and tracking this data.

Obtaining ESG information requires operations teams to scour legal documents, GP and LP financial statements, and any other relevant data. This can be a time-consuming and labor-intensive process.

Private issuers often see little benefit in obtaining an ESG identifier, and some even view deal privacy as a primary driver of alpha. However, obtaining an identifier could potentially provide greater visibility to the investment community while the company is private.

In the alternative assets industry, structuring and staffing are crucial for success.

Effective structuring involves creating a clear and concise organizational framework, as seen in the industry's adoption of private equity funds. This allows for efficient decision-making and allocation of resources.

A well-structured organization can help navigate the complexities of alternative assets, such as real estate investment trusts (REITs) and crowdfunding platforms. These structures enable investors to access a broader range of investment opportunities.

Staffing is equally important, with the industry relying on skilled professionals with expertise in areas like asset management and financial analysis.

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Structuring operations involves dividing tasks into manageable units to increase productivity and efficiency. This can be achieved by creating clear roles and responsibilities.

A well-defined organizational chart helps to visualize the structure of the operation, making it easier to identify areas that need improvement. For example, a company with a flat organizational structure might have a single decision-maker, whereas a company with a hierarchical structure would have a chain of command.

Clear communication is essential for successful operations, and this can be facilitated by regular team meetings and open channels of communication. In a company with a matrix structure, team members may report to multiple managers, requiring more effective communication to avoid confusion.

A company's operations can be structured around various functions, such as production, sales, and marketing. For instance, a manufacturing company might have a production team responsible for creating products, while a marketing team handles advertising and promotion.

Operations can also be structured around geographic locations, such as regional offices or international branches. This can be seen in companies with a global presence, where each region has its own operations and management team.

Finding the right talent to staff alternative operations teams can be a daunting task in a tight labor market. Operations managers struggle to find professionals with expertise in the nuances of individual alternative products.

Aruna Parthiban, Vice President in Asset Management Operations at Goldman Sachs Asset Management, notes that operations professionals must understand the entire front-to-back workflow and be aware of upstream and downstream impacts of any action.

Many operations professionals work on more than one asset class, which requires developing knowledge for each one. This can be a significant challenge, especially for those new to alternatives.

Not many people have the specific asset class knowledge required for alternatives, making it a very small pool of people who actually know this stuff, according to Jennifer Harris from J.P. Morgan Asset Management.

Firms are losing operations talent to hedge funds, boutique managers, and larger asset management organizations who are increasing their presence in alternatives.

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The future of alternative operations is an exciting space, with technology-enhanced environments becoming the norm. This shift will allow smaller firms to access the same functionality as their bigger peers, thanks to plug-and-play capabilities.

Real-time, predictive analytics will give leadership the insight needed to drive quality deal-making at higher volumes, according to Lionpoint Group's Jonathon Broch. The ultimate goal is an end-to-end system that delivers straight-through-processing for alternatives.

In this future, investors will be able to get NAV, performance reporting, and other information on any alternative product from the same source, in the same format at the same time.

The future of alternative operations is looking bright, thanks to technology advancements. Alternative ops have come a long way in the past decade, transforming from manual spreadsheet tracking to standardized data sharing across functions like treasury and cash management.

Technology innovations like the cloud, SaaS, and APIs have made it easier for asset managers to "plug and play" separate applications into their technology platform. This has expanded the market for third-party developers and forced investors to switch to digital systems and processes.

Today, asset managers have immense opportunities to leverage innovative technology, with over 50 solutions available for specific alternative ops functions. These discrete systems use APIs and other technology to create seamless connectivity, delivering comprehensive front-to-back coverage.

The interoperability of systems has allowed firms to go a la carte, and for vendors to focus on perfecting solutions for narrow functions. This has led to a proliferation of providers, who have come to market with solutions ranging from portfolio monitoring and CRM to investor reporting and accounting.

The increasing flexibility of technology platforms is expanding opportunities to outsource operational functions like valuations and fund administration. Supplementing the operations team with outsourced partners in specific areas can free up their time for work that can only be done internally, like credit agreement reviews.

In the future, alternative operations will be a technology-enhanced environment where asset managers employ a series of interoperable systems that perform specific tasks. These systems will automatically extract and share data, allowing smaller firms to access the same functionality used by their bigger peers.

The ultimate goal is an end-to-end system that delivers some level of straight-through-processing for alternatives. This system will be a sophisticated amalgamation of individual systems designed to meet the needs of certain asset classes or functions.

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Investors will be able to get NAV, performance reporting, and any other information on any alternative product from the same source, in the same format at the same time. This will allow the investor to self-service regular events like capital contributions, redemptions, and capital calls for any asset.

The industry is heading towards a "super middle office" configuration, where most or all of the core operational functions outside the middle office have been centralized and standardized.

The future of alternative investments is a double-edged sword, as Corrado Cominotto from Banca Generali puts it. As more investors gain access to these alternatives, returns are expected to decline due to increased competition and eroded illiquidity premium.

Democratisation of alternatives makes it possible for smaller investors to broaden their investment options, but it also requires clients to work closely with a professional banker. This can be a challenge for private bankers who may not have the necessary expertise.

According to Fahad Kamal from Coutts, the influx of capital into alternative investments will lead to a decline in returns. This is because the illiquidity premium that previously existed will be eroded.

Private banks that develop a robust alternatives offering will have a competitive advantage, says Claire Roborel de Climens from BNP Paribas Wealth Management. This can lead to increased customer satisfaction and a better risk-return investment profile for clients.

Private bankers who include alternatives in their product palette will "score points with clients", says Claire Roborel de Climens. This can be achieved through storytelling about unlisted companies, which represent approximately $15tn, or only 10-15 per cent of listed markets.

Private bankers may be reluctant to put their clients' money in alternatives due to lack of knowledge, heavy subscription processes, and complex reporting.

The alternative assets industry is evolving rapidly, and it's essential to stay ahead of the curve. As we've seen, the growth of digital assets is a significant trend, with digital assets projected to reach $1.4 billion by 2025.

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To succeed in this industry, it's crucial to prioritize transparency and regulatory compliance. This means staying up-to-date on changing regulations and ensuring that your investments are properly disclosed.

Investors are increasingly seeking alternative assets as a way to diversify their portfolios and potentially earn higher returns. In fact, 75% of investors believe that alternative assets are essential for achieving their investment goals.

In Ops, it's essential to have a clear understanding of your team's goals and objectives. This involves defining and prioritizing tasks, and setting realistic deadlines.

Establishing a robust communication channel is crucial to ensure seamless collaboration among team members. Regular check-ins and status updates help prevent misunderstandings and ensure everyone is on the same page.

A well-organized and centralized system for tracking tasks and progress is vital for Ops teams. This can be achieved through the use of project management tools like Trello or Asana.

Ops teams should also prioritize continuous learning and professional development. This can involve attending workshops, webinars, or conferences to stay up-to-date with the latest industry trends and best practices.

Automating repetitive tasks can help Ops teams save time and reduce errors. By leveraging automation tools, teams can focus on higher-value tasks that require human expertise.

A culture of transparency and accountability is also essential for Ops teams. This involves setting clear expectations and consequences for performance, and encouraging open communication and feedback.

The private banking market is ripe for innovation. Alternative asset managers are targeting private banks with smaller ticket sizes and dedicated teams.

Private banks are facing a significant opportunity to expand their offerings. According to McKinsey, private markets AuM reached $11.7tn in mid-2022.

Technology firms are stepping in to support wealth managers. They're providing operational and administrative support, setting up feeder structures, and bundling capital from private banking clients.

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The demand for alternative investments is on the rise. Wealthy individuals and advisers are looking for diversification options and better returns than public equity and bonds.

Private banks need to overcome some hurdles to deploy these solutions effectively. Alternative investments can be complicated to understand and implement, and clients often view them as opaque and risky strategies.

Educating clients on the value of direct and active investments is crucial. These strategies carry an "illiquidity premium" and can provide better returns, but clients need to be informed about their benefits.

Investors need to fully understand the scope of risks before incorporating alternative strategies into their investment plan. Barriers to investing in alternatives include high minimum requirements, higher fees, onerous subscription processes, cumbersome tax reporting, regulatory restrictions, and manager sourcing challenges.

High manager dispersion is a risk associated with private equity, where funds with "strong track records in operational upgrades" are more appealing. A common misconception is to consider alternatives as a monolithic asset class, while in fact they are a collection of strategies with different drivers, risk, and return profiles.

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Private credit and direct lending strategies are seen as a strategic source of income, diversifier of returns, and potential improver of a well-diversified portfolio's long-term risk-return characteristic. However, illiquidity issues suffered by hedge funds during the financial crisis remain fresh in investors' minds.

Investors should be aware of potential loss of capital, lower transparency, use of leverage, higher dependence on a manager's investment skillset, potentially longer investment horizons, and illiquidity when investing in alternative strategies. Bankers need to be accountable for clearly explaining these risks to investors.

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Private assets are "very attractive in theory, but there's lots of practical problems with employing them on a wider basis" due to large ticket sizes and illiquidity.

The largest hurdles to employing private assets on a wider basis are large ticket sizes and illiquidity.

Capital will likely flow from clients' traditional investments to private assets, potentially increasing clients' share of wallet for the bank.

A multi-trillion dollar asset class, private assets are on the verge of becoming investable for most private banks.

We need to educate ourselves on private assets first and then educate our client base if we are going to be putting assets into that space.

Alternatives and private markets will represent a major future battleground for wealth managers.

Investing in alternative assets can be a lucrative way to diversify your portfolio, with some assets offering returns of up to 10% annually.

The alternative assets industry has experienced significant growth in recent years, with assets under management increasing from $1.4 trillion in 2015 to $3.4 trillion in 2020.

Diversification is key to managing risk in alternative investments, with a study showing that a portfolio of 10-15 alternative assets can reduce overall risk by 30%.

Investors should carefully consider their risk tolerance and investment goals before investing in alternative assets.

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