Will well-established alternatives managers come out on top in the wake of coronavirus?

Share:
  • Facebook
  • Twitter
  • Print
  • Email
  • Comment

Double exposure man handcrafted business with buildings in city and rising graph © Sasin Paraksa /123RF Stock Photos In the wake of the coronavirus fallout, real estate, infrastructure and private debt investors seem to be zeroing in on well-established managers, according to Preqin Ltd. data for the second quarter of 2020.

With no surprise, real estate saw a challenging second quarter with a decline in activity in funds closing compared to the first quarter. Yet the aggregate capital raised increased from US$28 billion to US$39 billion, Preqin found.

As well, investors are increasingly targeting commitments to a single fund, with just over half of investors saying they were targeting one fund in the year ahead as of the second quarter of 2019, compared to 77 per cent in 2020. “This could come down to the limited potential for due diligence across numerous funds, as a result of travel restrictions and stretched resources,” said Preqin’s quarterly report on real estate. “Alternatively, it may reflect a desire to prioritize a specific strategy in which they have confidence.”

The Preqin data also showed investors are concentrating commitments with fewer managers and focusing on well-established funds. “In a volatile economic climate, over two-thirds (69 per cent) of funds closed in the first half of 2020 met or exceeded their initial target. When compared with the annual average of 62 per cent between 2015 and 2019, this likely reflects investors’ increased focus on established managers during this uncertain period.”

Unlisted infrastructure also had a rough go in the second quarter, with the total capital secured by infrastructure funding reaching the lowest amount in a second quarter since 2016 and dropping 70 per cent compared to the previous quarter.

Only 15 infrastructure funds reached their final close, the lowest quarterly count in five years, according to Preqin, which noted a smaller group of well-established managers are earning an increasing portion of capital commitments. The number of deals also fell by more than 39 per cent compared to the same time last year and deal value dropped 74 per cent.

“In a volatile environment, investors gravitated heavily toward established fund managers, total commitments plummeted and funds took longer to reach a final close,” said Preqin’s quarterly infrastructure report. “Looking forward, investors appear to be scaling back the size of their planned commitments overall, but are being selective, setting aside more capital for the right fund managers.”

In particular, investors appear to be dialing back commitment size and deal activity is down across all major regions and sub-sectors. Further, infrastructure investors are taking a selective approach to fund commitments, with 92 per cent planning to only commit to one fund over the next 12 months, compared to 66 per cent that said the same at this time last year. “That said, investors appear to be earmarking more fresh capital for these funds. The proportion of investors planning to commit US$100-499 million over the next year has increased to 33 per cent in Q2 2020 from 28 per cent in Q2 2019.”

And while the majority of investors seem to be preferring primary funds, appetite for debt and mezzanine infrastructure funds has risen to 34 per cent from 15 per cent last year, Preqin found. “Amid the economic turmoil caused by COVID-19, central banks have committed to keeping interest rates near record lows. Against this backdrop, investors’ increased appetite for debt/mezzanine funds could reflect a growing demand for yield that is backed by critical infrastructure with contractually secured cash flows.”

In contrast to real estate and infrastructure, private debt saw a strong second quarter of 2020, with US$34 billion raised compared to US$22 billion in the first quarter of 2020, according to Preqin’s quarterly private debt report. “What’s more, an increasing number of funds are coming to market: there are now a record-high 486 funds on the road, seeking US$239 billion in aggregate capital,” it said.

Further, the amount of investors looking to allocate more than US$50 million over the next 12 months is up to 63 per cent in the second quarter, from 36 per cent a year earlier. And the number of investors looking to commit US$300 million or more is up to 10 per cent from six per cent. “In making larger but fewer commitments, this suggests investors are gravitating toward trusted, established managers amid the downturn.”

Of note, similar to real estate and infrastructure, the proportion of private debt investors interested in allocation to more than one fund over the next year is down compared to the second quarter of 2019. In fact, 67 per cent of investors are planning to allocate to a single private debt fund in the next 12 months.

“Overall, our data shows that private debt investors are adapting their strategies to this new, volatile environment,” Preqin said. “And that means a greater reliance on trusted, experienced managers — in short, adopting safety behaviours.”

Add a Comment

Have your say on this topic! Comments that are thought to be disrespectful or offensive may be removed by our Canadian Investment Review admins. Thanks!

Contex Group