Last week in London, Preqin, the home of alternatives, discussed the global outlook for the alternative asset industry in 2023 and beyond.

Despite the challenging environment, Preqin's CEO Christoph Knaack said last week that the alternatives assets industry is still growing, with global private capital assets under management set to almost double to $18.3 trillion by 2027.

“Private markets have been in a super cycle in the past two decades. But given the macroeconomic environment, investors are now operating in a more challenging environment, faced with high inflation and rising interest rates,” he said. 

Nevertheless, he expects more sustained growth in those asset classes that perform well in volatile markets. “For instance, infrastructure, natural resources and private debt will provide some sort of inflation protection,” he continued. Knaack thinks that the continued demand for these asset classes will push private capital to new heights. As the industry innovates, Knaack also expects growing demand from retail investors and private investors, especially amongst high net worth individuals.

There has been a shift from public, listed equity markets and mainstream bonds toward private equity and credit over the past few decades. This has been driven by a mass of forces, such as more onerous reporting standards on listed firms since the Sarbanes-Oxley accouning laws in the US two decades ago, a desire to get away from the relentless focus that stock markets entail, and investor desire for the premium that less liquid investments bring. A decade of ultra-low interest rates has caused this hunger for yield, adding to the shift.

Preqin’s head of research insights Dave Lowery highlighted how the macroeconomic environment has shifted significantly in 2022: “We survey our investor clients twice a year, the most recent one being in November, which showed private equity, venture capital, and real estate investors are quite pessimistic about the valuation outlook amongst those asset classes, seeing them as overvalued.” 

On asset class performance in 2023, he said that private equity, venture capital and real estate investors are pessimistic and expect returns to weaken over the next 12 months compared with the last. 

Private equity
The firm’s report on The Future of Alternatives In 2027 shows that the combination of higher interest rates and slower overall economic growth prompted by monetary tightening is likely to impact private equity as an asset class. 

The tailwinds that have helped private equity outperform public equity markets are calming. Fundraising in 2022 was the weakest in the last six years ($562.8 billion raised, vs $563.1 billion in 2016), Lowery said.

Venture capital
Even with the challenging macroeconomic outlook, the report states that venture capital is likely to continue as a core allocation for returns' seeking investors – especially once the valuation adjustment is complete.

2023 should be a good year for capital deployment, Lowery said. Lower valuations will provide the opportunity to buy assets at far lower multiples, resulting in solid performance.