New trends emerge in the alternative fund industry as investors vary income sources.

Historically, investors have been looking for traditional products for income, such as office real estate. But new trends seem to emerge as these search for new capital flows: “We see a whole range of alternative asset classes such as core real estate funds, data centres, infrastructure and debts, which aim at providing new income to investors,” said Robert White.

The partner at EY moderated a panel discussion on the latest trends in alternative investment funds, during the ALFI Rentrée conference on 17 September 2020.

“In the US, significant opportunities already exist in new asset classes including health care, student housing and storage spaces,” explained Paul Bashir, CEO at Harrison Street Europe. “They are among the best performing income core funds”.

However, European markets remain fragmented and still further behind the trend: “Before investing, we have to look at almost each country and at each individual alternative sector separately, and see where the sector is in the life cycle of the investment strategy,” Bashir added.

But in countries such as the UK, some alternative sectors are becoming more income-focused, he noticed: “Student housing is probably the most mature market in Europe: Return profiles have started to reflect long term income focus”.

Hot spots

More generally, Bashir already foresees more core fund launches in 2021 in Europe. “These will specifically target markets that already reached a stable and mature stage of evolution, such as health care, students housing and life sciences,” he said.

“IT and health care are among the hot spots,” continued Markus Benzler, Global Head Multi-Manager Private Equity at UBS. “Investors who traditionally invested in industrial and retail sectors, are not afraid anymore to deploy capital in these new asset classes”.

Benzler also noticed a trend shift in market allocation: “With the continuing low-rate environment, we see special institutional investors moving towards European and Asian markets,” he said. “Such as Japan, which has become one of the largest allocation markets for private equity”.

The tendency accelerated with the pandemic: “The US have been dominant in terms of returns over the past years. But private equity now turns to Europe and Asia, where the recovery after Covid is faster,” he said.

“In terms of product manufacturing, we have been witnessing an increase in design of sophisticated vehicles for alternative funds,” Robert White added.

Jérôme Wigny, Partner at Elvinger Hoss Prussen, explained that many new alternative products, which have been recently set-up in Luxembourg, largely focus on US managers: “A good number of these managers are still discovering the Grand-Duchy and are now setting-up funds there,” he observed.

“If they are considered as small and medium-sized actors in the US, they remain large by European standards”.

According to Wigny, these ‘newcomers’ are now following other US managers who started setting-up funds 3 or 4 years ago in the country and are now systematically including Luxembourg-based vehicles into their offering.

“These funds are usually designed for European investors, while they are linked to a main US fund, which is traditionally located in Delaware or in the Cayman Islands,” Wigny detailed. “That way, they allow investors to opt for one or both structures”.

Resilience

“Both have the same features and characteristics. It is then easier to replicate the Delaware and Cayman partnerships and to mutualise the costs. We just have to add the European permission,” Wigny added. “It is therefore easier for US managers to raise further capital from European investors and to get a critical mass of European investors who target Luxembourg funds”.

The five experts agreed that investors are now starting to strongly re-emerge in a busy Q4-period. They also expect the activity to re-peak-up in 2021, especially in these new asset classes.

“It is important to realize that capital markets are still functioning after the pandemic,” said Peter Veldman, Head of Fund Management, Luxembourg at EQT. “The incumbent relationship with our LPs remains strong. And the alternative funds industry is quite resilient”.

Despite the resilience, “the Covid-19 has influenced the business organization of fund management companies,” White noticed.

For Veldman, the biggest challenge during the pandemic has been to operate on remote mode: “We put our operations on digitization and made sure that we could work from everywhere with every device,” he detailed.

During the period, the Swedish company also decided to develop new processes, such as on investors due diligence: “We had to reconsider our approach and switch our ‘operational due diligence days’ meetings with the entire operational teams, to online sessions,” he said. “Now that we have this virtual similarity, which works perfectly, it will stay. Absolutely!”.