The alternative assets industry reached a record size as of the end of 2016, according to the latest performance analysis data released by Preqin examining assets under management, horizon returns, public market equivalents and top performing funds.
Hedge funds saw their assets hit a record USD3.25 trillion, despite net investor outflows through the year. Private capital funds, meanwhile, increased their assets by over 7 per cent, from USD4.27 trillion as of the end of 2015 to USD4.59 trillion 12 months later. Private equity funds represent the largest proportion at USD2.58 trillion, followed by real estate (USD785 billion), private debt (USD605 billion), natural resources (USD501 billion) and infrastructure (USD388 billion) funds.
Looking at the median returns reported by public pension funds, over the five years to the end of 2016 private equity funds have generated a median net annualised return of 11.4 per cent, while real estate funds have returned 11.3 per cent. This compares to 5.2 per cent for hedge funds, and 9.1 per cent for listed equity. In fact, private equity funds have seen median net IRRs exceed 10 per cent for every vintage year since 2007, while real estate fund median net IRRs have surpassed 14 per cent in every vintage year from 2009 onwards. Only two vintage years in the 21st century, 2005 and 2006, have seen median private equity returns fall below 10 per cent.
The distributions returned from private capital funds to their investors have exceeded total capital calls in every year since 2013. The difference between the two, the net capital flow to investors, has been increasing: distributions outstripped capital calls by USD121 billion in 2013, but in 2016 net capital flow to investors totalled USD402 billion. The level of called-up capital fell from USD656 billion in 2015 to USD507 billion in 2016, while global distributions rose from USD858 billion to USD909 billion in the same period.
The majority of investors reported to Preqin in June 2017 that they were satisfied with the performance of their investments across most asset classes. However, there is a sharp divide in opinion: over the three years to the middle of 2017, more than a fifth of investors in private equity, real estate, private debt and infrastructure said that these asset classes had surpassed their performance expectations. Conversely, across the same period 50 per cent of natural resources investors and 70 per cent of hedge fund investors felt that their portfolios had underperformed.
There is a strong correlation between the quartile performance of private capital funds and that of their successors. Thirty-five percent of top-quartile predecessor funds have top-quartile successors, while just 14 per cent are followed by a bottom-quartile vehicle. At the other end of the scale, 38 per cent of bottom-quartile private capital funds are succeeded by another bottom-quartile vehicle, while only 14 per cent have successors which reach the top quartile.
