TOKYO -- Infrastructure investments are expected to overtake real estate as private assets in the 2030s, as investment in alternative assets is expected to expand 74% to $29 trillion between 2023 and 2029, according to a report released by Preqin on Wednesday.
The period through the end of the 2020s is expected to see continued outflows of foreign capital from China and further growth in India's private capital market. "[W]e expect investment opportunities [in India] to extend beyond bitesize venture capital deal opportunities and move into larger private equity transactions," the alternative asset data provider said.
Japan and South Korea are expected to retain their levels of total activity, according to Preqin.
Infrastructure investments are expected to center around energy projects. New energy investments will be supported by accommodative regulatory and subsidy programs across developed markets amid efforts to decarbonize electricity generation, the report says.
Real estate investment, meanwhile, has been hampered by higher interest rates and a wider adoption of hybrid work styles, reducing demand for office space.
Infrastructure assets continue to catch up with real estate in terms of total assets under management (AUM). "This points to the credible prospect of unlisted infrastructure overtaking private real estate in AUM terms in the 2030s, given the tailwind from the continuing energy transition propelling the asset class forward," the report says.
Meanwhile, the headwinds from higher interest rates are expected to continue as investors adjust their expectations on U.S. monetary policy. "Back in December 2023, Fed rates were expected to fall closer to 3.25% by 2026, but this has increased closer to 4% as of June 2024, affirming the market's reluctant acceptance of the higher-for-longer scenario," the report says.
Private asset performance tends to be affected by interest rates as the assets typically rely on debt for financing.
The U.S. Federal Reserve is widely expected to announce the first rate cut in more than four years later on Wednesday, bringing the rates down from a decades-high level of 5.25-5.5%. With the pace of easing expected to be gradual, however, the report predicts deal activity will not accelerate till 2027.
The private market covers investments in assets that are not publicly traded and include private equity, private debt, real estate, venture capital, infrastructure and hedge fund investment. Such investments are less liquid and carry higher risks but are seen as offering superior returns. Japan's Government Pension Investment Fund, one of the world's largest pension funds, has been investing in alternative assets since 2013, even though they accounted for just 1.46% of its AUM versus the target of 5%.
More recently, however, traditional asset managers have been stepping up their private market offerings in an effort to differentiate themselves from low-cost passive investment vehicles that focus on public assets.
Private assets are usually managed by highly experienced dealmakers and fund managers, who are capable of identifying the best companies to invest in across the public and private sphere and adding value to the operating performance of the companies they back.
Today, private equity makes up the biggest portion of alternative investments, accounting for 35% of the total AUM or $5.8 trillion in 2023. The share is projected to rise to 41% or $12 trillion in 2029, according to the report.
On the other hand, the share of hedge fund investments, the second largest alternative investment category, is expected to fall to 20% from 27%.
Investments in private debt are expected to increase to $2.6 trillion, up 76% and on par with real estate. Private debt involves lending money to companies just like banks. But it focuses on types of lending traditional banks do not pursue, such as providing financing for leveraged buyouts, and lending to hedge funds and startups. Private equity companies tend to provide both debt and equity to support the acquisition, growth or restructuring of companies.
Recent examples of deals financed by private debt include the $13 billion acquisition of Norwegian online marketplace operator Adevinta by a Blackstone-led consortium, completed in May, and the $6.9 billion acquisition of British financial services company Hargreaves Lansdown by a CVC-led group, announced in August.
