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Connection Capital survey reveals increase in HNWI alternative investment allocations

High net worth investors (HNWIs) are including much higher weightings of alternative investments in their portfolios than five years ago, with four in 10 investors (41%) now allocating more than 20% to the asset class, according to research by Connection Capital, a specialist private client alternative investments business.

Private investors’ exposure to alternative investments has been increasing steadily as they hunt for superior returns and diversification from quoted markets. In 2018, the first year the survey was carried out, a quarter (26%) of respondents had 20% or more of their portfolios invested in alternatives, and this had risen to around a third (35%) last year.

Almost three-quarters of HNWIs (74%) are now allocating more than 10% of their portfolios to alternative investments, up from just over two-thirds (68%) last year and half (50%) in 2018, demonstrating how mainstream the asset class has become. Alternative investments includes private equity, private debt, commercial property, infrastructure and alternative fund strategies.

The findings point to a major overhaul of the traditional portfolio mix of a 60% allocation to quoted equities and 40% to bonds, as investors look at ways to safeguard their capital and make money as economic and financial market conditions deteriorate. 

Interest in alternative assets gained extra momentum during the turmoil of the Covid-19 pandemic, when many private investors increased their liquidity so that they could seize good investment opportunities when they arose.

One in three HNWIs (33%) plan to increase their exposure to alternative assets over the next 12 months, whereas only one in seven (14%) expect to increase their exposure to quoted equities. Fewer than a fifth (18%) say they feel optimistic about the outlook for quoted equity performance over the next 12 months. 

Private equity is the most sought-after alternative investment class, with single private equity transactions and growth and buyout funds seeing most interest from private investors, followed by special situations and distressed debt funds, later stage venture capital investments and PE secondaries strategies.

Private equity’s position as a long-standing top performer is a key motivator. According to McKinsey , private equity has been the highest-performing private market asset class over the past decade with a median net internal rate of return (IRR) of 19.5%. 

It also continues to outperform public markets, with median funds in every private equity vintage since 2009 returning at least 1.06 times their public market equivalent to date.

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