Over the last 18 months the United States and World economies have been  hit with a recession which many can only compare to the Great Depression of the 1930’s here in the US.  A tremendous amount of personal wealth has been lost and many institutions are now heavily underfunded for future obligations.   As the recession started we saw a large outflow of assets from alternative investment strategies leaving many professionals wondering whether alternative investment vehicles would survive and if the asset class itself would be forever changed.

15 to 18 months later the economy still seems to be on shaky ground and the stock market seems to be in the midst of a correction after having a sharp run up over the past few months.  Asset raising is still extremely hostile except for a very few firms.  Many firms have had to close their doors due to redemptions, performance or a combination of issues.   During this time of confusion, or some might say chaos, a bottom seems to have been created for the alternative asset class. We believe the alternative investment space is readying itself to bounce from this bottom and experience what could easily become “the Golden Age of Alternative Investments.” 

The prediction of this Golden Age is based on the occurrence of two dramatic shifts in the business of alternative investment strategies.  The first is that many investors believe the valuations of companies both private and public as well as many other investment instruments in general have become more attractive and are closer to actual value than they have been for some time.   Though the existence of this down shift in valuations to “fair” can also be argued as under or over-valued it is certain that most companies and investment instruments have become more attainable for those with assets to invest.  The second adjustment is related to specific asset classes that are available and attractive to investors and is far more important to professionals at alternative investment firms.

 The large institutional investors, public pensions, private pensions, endowments and retirement programs are in most cases severely underfunded and must seek alpha producing products.  Although the risk with alpha products is considerably higher than to that of T-Bill for example, the extremely low rate of return for T-Bills make them a less viable product for these institutions which are in need of significant capital appreciation.  In the past these large investors expected their members or overseeing agents to be their safety cushion and provide them additional capital when needed. Now these members and agents do not have the additional capital required and therefore cannot put additional funds into the system.  As a result, these institutional investors are forced to go to the alternative investment asset class to try to increase their assets through a better return on capital to hopefully recoup their losses and regain some ground towards their obligations.

This need for alpha producing products should create a large opportunity for alternative investment firms to not only increase their capital under management but to also help identify new buyers for their portfolio companies.  The majority of pension funds that already invest with private equity and hedge funds firms will have to increase their allocation in this asset class.  Several have already publicly mentioned a significant allocation shift to the alternative class.  Funds that have invested little if any into the alternative class will find themselves in need for significant alpha to compete and meet their obligations and will also make new initial investments into this asset class.

Although the shift in assets and capital may take some time to materialize, it will happen out of pure necessity. When it does, the alternative investment industry will see tremendous growth in investment opportunities and more importantly for our members, growth in employment opportunities.   It is essential for alternative investment firms to continue to source new potential investors and maintain strong client interaction.  Even though these directives are exceptionally tough during this slow asset raising period, this is the time to create strong relationships which will hopefully put your firm on the short list when the investors are ready to put their money into alpha producing assets.

The firms that understand the new business models and rules associated with each investment product within the alternative asset class will benefit the most from the inflow of capital into this specific asset class.  What are the new business model and rules of the alternative asset class? Look for this discussion in an article next month.