Future of Alternatives 2025: Market Maturity in North America

Alternatives investors should keep their high-level allocation steady, but the make-up should favor dividend-like, lower-risk options 

The North American alternatives market is mature compared to its global peers. It is the world’s largest, with more than 60% of private assets invested in the region, and therefore likely to grow more slowly than emerging regions through to 2025. As Fig. 1 shows, Preqin predicts that North American alternative assets under management (AUM) will grow an average of 5.4% a year through to 2025. This is slower than the global average (9.8%), and significantly slower than Asia-Pacific (25.2%). 

North American investors have not lost their appetite for alternatives, but some classes of investor may have reached a point where continued upward movement is unsustainable or impractical. For example, after ramping up investment after the Global Financial Crisis, the region’s largest public pension funds have not increased their alternatives allocations by more than one percentage point since 2012 (Fig. 2). The need for liquidity factors heavily into this, with most pension funds needing their investments to offset average net distributions upwards of $450mn annually.

Complicating the issue for investors is the Fed’s ‘lower-for-longer’ approach to interest rates, renewed amid 2020’s COVID-19-related downturn. The ripple effect this creates through the economy lowers return expectations and discount rates, consequently increasing liabilities. This can be a boon for alternatives managers as it increases demand for exposure to higher-return assets.

Performance Will Drive Asset Classes
Private equity dominates the market, accounting for more than 60% of all private capital raised in the past decade. This is unlikely to change over the next five years, given that the asset class has posted some of the best returns for investors. Over the 10-year horizon ending March 2020, North American private equity funds averaged a 14.3% annual return; however, the build-up of dry powder over the past decade points to difficulties deploying capital (Fig. 3). 

Looking ahead, in its August 2020 capital market assumptions, investment giant BlackRock sees US private equity outperforming every other asset class over both the middle and long term, with a mean expected return of 11.9%. That said, it does see a wider range of uncertainty than almost all other investments, from 2.4% for the mean uncertainty lower return to 22.3% for the mean uncertainty upper return. 

Two asset classes that will attract more attention are private debt and infrastructure. Both offer yields higher than traditional fixed-income assets, which have been low and will remain low for some time. Preqin is forecasting global private debt AUM growth of 11.4% annually to 2025, which would make it the second fastest-growing asset class after private equity. Infrastructure, with its relatively safer risk/return profile, is predicted to grow 4.5% over the period.

We expect investor enthusiasm for North America to wane in favor of other markets. Currently, 57% of those surveyed for Future of Alternatives 2025 believe North America is providing the best investment options at present, but that proportion drops to 38% for their 2025 predictions (Fig. 4). Investors appear markedly more positive about future investment prospects in Asia-Pacific and emerging markets, putting them on par with North America.

Alternatives in North America are not going anywhere. The return premiums on offer compared with their public counterparts are too high to ignore, regardless of the risks. The North American macroeconomic picture will be overshadowed by low interest rates and how the COVID-19 pandemic plays out. These factors will fuel greater diversification into strategies that offer yields now, and regions where valuations create better opportunity.

Download a data pack containing all the charts in our regional articles for Future of Alternatives 2025. For more predictions and projections from Preqin on the future of the alternatives industry, visit our Future of Alternatives 2025 Content Hub.