Alt Investments

Limited Partners Continue Alternative Assets Enthusiasm; Frown On Cryptos – Study

Tom Burroughes Group Editor 6 September 2023

Limited Partners Continue Alternative Assets Enthusiasm; Frown On Cryptos – Study

A study of LPs finds that they have not greatly changed some kinds of investments, although they have definitely cooled on cryptocurrencies amid volatile markets, inflation and rising interest rates.

Limited partners, aka investors, in alternative assets such as private equity and venture capital are sticking with their commitment to the sector despite the buffeting of higher interest rates and other forces, a new report says. 

More than half of LPs (56 per cent) are still increasing alternative investments and a similar percentage indicated that they would do so in 2022. A higher percentage in 2023 (86 per cent) plan to do so via fund managers, according to the Dynamo Frontline Insight Report: Analyzing Trends, Identifying Challenges, and Harnessing Insights from Leading LPs & Asset Allocators. 

In other details, the 19-page report found that more LPs and asset allocators are considering secondaries in 2023, jumping nine points from 2022. (The term refers to buying and selling pre-existing stakes in private equity, credit, real estate, and infrastructure.)

The study shows that limited partners have fallen out of love with cryptocurrencies, stung by their apparently inability to provide much or any hedge from inflation. Just 3 per cent of LPs held them in the latest survey, from 13 per cent the previous year. Derivatives and cryptocurrencies were the two areas where LPs pulled back when it comes to investing in alternatives. 

According to the report, LPs say that economic uncertainty, automating manual tasks, and employee recruitment/retention are the top challenges of 2023. 

Holding fire
This year’s survey did not indicate notable movement in terms of where LPs plan to deploy capital. 

In this year’s survey, respondents indicated that the US/Canada continue to lead the pack (71 per cent), followed by Asia (14 per cent) and Europe (14 per cent). (The bulk of the survey respondents were located in the US/Canada (65 per cent) and Europe (18 per cent).)

The study showed that there was an absence of Middle East market investments as part of the strategy of the LPs surveyed. In 2023, no LPs or asset allocators reported plans to deploy capital in the region. In the 2023 GP survey, respondents limited the Middle East to just 3 per cent. (Editor’s note: that result may perplex some readers; we carried this UBS report which discussed digital technology potential in the Middle East.)

On a more upbeat tack, for the first time the survey asked limited partners what they thought of artificial intelligence as an investment area and what specific areas global LPs would like to see their technology-focused fund managers hold. Generative AI landed as the top priority, followed by edge computing and native clouds (e.g., managing cloud networks and plan for future scaling). Automation and hyper-automation were also of interest to survey respondents. (“Edge computing” is a distributed information technology architecture in which client data is processed at the periphery of the network.)

“As LPs and their GP counterparts strategize around generative AI, native cloud, and automation-focused investments, they are also looking to adopt many of these technologies internally. In addition to the  improvement of processes, LPs recognise an opportunity to improve the recruitment and retention of high-quality talent,” the report said. 

The study surveyed more than 100 global LPs and asset allocators. Most respondents were located in the US and Canada (65 per cent), followed by Europe (18 per cent), Asia (11 per cent), and the remaining were split between Central/South America and Australia/New Zealand. Most of the participating firms invest in under 50 funds (52 per cent) with 33 per cent of respondents investing in more than 100 funds. 

Total assets under management ranged from more than $10 billion (35 per cent) to under $1 billion (35 per cent), with the rest being between $1 billion to $10 billion (30 per cent). The online survey was conducted throughout July and August 2023.

In other areas, the report examines business process and workflow challenges for LPs; investment processes; research management; portfolio management; and document and data management. 

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