Why illiquid assets are the future of alternative investing
Illiquid alternatives could be a viable option for investors with long investment horizon
1 Nov 2016 | Bayani S Cruz
The growth of illiquid alternatives, particularly institutional loans and private debt, are expected to keep pace with the expansion of the more popular alternative investments including real estate and hedge funds as investors further diversify portfolios.
“I have assumed that investors are looking for yield at all times, but, in fact, what they’re looking for first and foremost are assets that will provide diversification and low correlation with everything else they have in their portfolio,” says Deborah Zurkow who assumed the global head position for alternative investments at Allianz Globa Investors (AllianzGI) in June 2016.
Illiquid alternatives are not traditionally at the top of anyone's investment list, yet investors are increasingly turning to them as a way to diversify and shield their portfolios from short-term market shocks. Data compiled by AllianzGI indicate that illiquid alternatives have grown substantially post-global financial crisis. Going forward, illiquid alternatives are expected to more than double to US$2.4 trillion dollars in asset under management by 2020 from US$1.1 trillion as of 2015.
AllianzGI alternative investment portfolio has 18 billion euro in asset under management as of June 2016, of which 8 billion euro are in illiquid assets and 10 billion euro in liquid alternatives.
Its illiquid alternatives portfolio include 6.1 billion euro in infrastructure debt, 634 million euro in infrastructure equity, and 800 million euro in private debt. The liquid alternatives portfolio consists of alternative funds in Ucits and 40-Act format.
AllianzGI’s infrastructure debt portfolio more than doubled in 2015. It grew 29% in the first quarter of 2016. The infrastructure equity segment posted steady asset growth from a low base of 10 million euro in 2013 to 552 million euro as of end 2015. On the private debt side, AllianzGI plans to launch a new vehicle at the end of 2016 with 300 million euro in commitment.
“Going forward to 2018-2020 there will still be growth in the other areas of alternative investments, but the stronger growth will be illiquid alternatives and liquid alternatives,” Zurkow says.
Investors like alternative investments because they are uncorrelated to other assets. “It’s obviously correlated to underlying government rates, but the success or failure of a toll road is fairly uncorrelated to anything else that investors are looking at,” Zurkow adds.
Another benefit of investing in illiquid assets is that investors can get a premium because such assets cannot be easily sold without a substantial loss in value.
“As a result of the recent market volatility, illiquid alternatives could be a viable option particularly for institutional investors with longer investment horizons,” Zukow says.
But illiquid assets also come in complex structures and can be inflexible. Difficulty in selling the asset is also a barrier to investing in illiquid alternatives.
“However, being locked into an illiquid strategy may help protect investors from their own biases. We noted investors struggle to avoid making emotional decisions during periods of market upheaval. Having an allocation to illiquid assets means they are less likely to make rash choices driven by fear, at least on that portion of their portfolio,” Zurkow says.