Market Changes in 2016 Trigger Increased Investment in Illiquid Assets

By: Punit Satsangi

istock_000023329919_xxxlarge

We’ve seen a lot of change and volatility in 2016 and there are concerns that some regions are moving towards Japan-style stagnation. This is especially true in Europe, where there are ageing populations, troubled/undercapitalized banks, and poor growth.

Following several years of quantitative easing (QE) in major economies, current interest rates are low, or even negative in some economies. The European Central Bank (ECB) is the latest monetary authority to introduce QE. Safe government bonds in some developed countries have negative yields, which means investors who hold on to them make a loss. Meanwhile, equity market risk has heightened amid Brexit, volatility in southern Europe (e.g. Italy), uncertainty following the election of Donald Trump as US president, and concerns of a hard landing in China.

To ensure returns in these difficult markets, many investors are diversifying away from equities and bonds, investing instead in alternative asset classes. This shift benefits managers that transact in illiquid assets (e.g. private equity, hybrid structures, or alternative credit). Assets invested in alternative credit have risen almost $100 billion to $560 billion since 2015. Since illiquid asset classes are long-term and can weather short-term market malaise, they appeal to today’s investors.

For example, sovereign wealth funds and insurance companies are investing more heavily in illiquid asset classes. Insurance companies must meet long-term liabilities, while some sovereign wealth funds in energy-producing jurisdictions face challenges due to falling commodity prices. These investors must ramp up exposures to assets that offer superior returns to bonds, and that have less correlation risk to equity markets; illiquid assets meet these criteria.

In addition, to cover increasing liabilities (i.e. an ever-growing pool of retirees), pension funds are turning to private equity and alternative credit for returns. The long-term investment horizon of pension funds, and their willingness to accept protracted lock-up periods, aligns them with the lifecycle of illiquid asset classes. If pension funds are to plug deficits, continued investment in fixed income is simply not an option.

Today’s interest in illiquid asset classes is likely to continue to grow. SS&C GlobeOp is a leading fund administrator that provides the world’s most comprehensive array of financial technology products and services under a public, independent, single platform. Our expertise in business process outsourcing supports complete lifecycle capabilities and is available on a stand-alone basis to hedge funds, fund of funds, private equity funds, family wealth offices, and managed accounts. For more information, contact solution@sscinc.com.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s