Alternatives Market Briefing General Trends Public Pensions Allocations to Alternatives 1 Roughly 20% of public pension assets and 14% of corporate pension assets are invested in alternatives. The allocation rate is increasing at approximately 1% to 2% of total assets per year. Hedge funds represent the fastest growing subgroup of alternatives. 1 Alternative asset managers are faced with increasing demands for information into their operations and controls, regulatory compliance, reporting of investment performance and various tax related issues. 2 For both alternative and traditional managers, offering alternative strategies in a registered fund structure opens up a substantially broader market opportunity by reaching the retail market. A diverse group of strategies, including long/short and global tactical asset allocation, and a varied Competitive group of managers Landscape are already experiencing success with these products. 3 Continued growth and market presence of alternative investments has resulted in increased focus of regulators and analysts on the transparency of financial reporting and key performance indicators. 2 Pure play traditional asset managers are using acquisitions of alternative asset managers to expand their product offerings, distribution channels and geographic reach. Smaller players are consolidating to attract investors and absorb increased costs associated with investor transparency requirements and regulatory costs. 2 Market Highlight Effectiveness of Alternatives Consultants 4 Hedge Funds 18% Real Estate 31% Real Assets 6% Private Equity 45% Approximately 20% of public pension assets consist of alternatives. Private equity and real estate together comprise three-quarters of current public pension allocations to alternatives, followed by an 18% allocation to hedge funds and a 6% allocation to real assets. Underlying these allocations is a shift from real estate into hedge funds and real assets. Hedge funds currently represent 3% of total public pension assets and 18% of alternative assets. Those figures are up from 2% and 15%, respectively, in fiscal 2009. On the other hand, current real estate allocations equal to 6% of total assets and 31% of alternatives represent a year-over-year drop from 7% and 38%, respectively. Projected Growth of Alternative Mutual Funds & UCITS 3 Overall, consultants still factor heavily into the investor decision making process when it comes to capital allocations. Assets in alternative strategy UCITS and mutual funds should top $1 trillion in 2014, assuming only modest performance gains over the next few years, and barring a dramatic bear market. By 2016, assets in such funds should more than double the current $644 billion. Absolute return, hedge fund-like strategies, and global tactical allocation funds are likely to be major drivers of this growth. Sources: (1) Cliffwater Allocations to Alternative Investments ; (2) PWC 11 th Annual Alternatives Investments Seminar ; (3) SEI Regulated Alternative Funds ; (4) ) Preqin - "The 2012 Preqin Alternatives Investment Consultant Review 1
Asset Size ($mm) # of Funds (w/fohfs) Hedge Funds Market Briefing General Trends Estimated Historical HF Industry AUM & net inflow in USD (MM) 1 The industry ended the year nearly at the same levels where it started the year. In Q1 2011, asset levels eclipsed the $2 trillion mark, and peaked at $2.04 trillion at mid-year before declining to $1.97 trillion to end the volatile 3Q11. Total hedge fund AUM finished the year at $2.01 trillion, as 4Q11 performance gains offset a nominal net capital outflow of $127 million, a figure representing approximately 0.007% of total industry AUM. 1 2,500,000 2,000,000 7,800 7,600 For the full year 2011, investors allocated $70 billion of net new capital to hedge funds, a volatile performance year in which the HFRI Fund Weighted Composite Index declined by -5.0 percent, only the 3rd calendar year decline since 1990. 1 The complexity and breadth of the European debt and currency crisis contributed to a challenging performance environment for hedge funds in 2011 and, as a result, investors tactically positioning exposures to provide positive portfolio optionality and to monetize opportunities created by fluid developments. 1 Institutional allocations are continuing to rise. Nearly 38% of investors said they plan to increase their allocations to hedge funds over the next 12 months (vs. 54% a year earlier), while 15% expect to lower them (vs. 11% a year ago). 2 Investors stated goals also reflect emphasis on risk management. Three of the top four goals named by respondents accessing non-correlated strategies, diversification, and lowering volatility address investment risks. This suggests that institutions today use hedge funds to help them lower portfolio risks and boost returns. 2 Investors in hedge funds also expressed a clear preference for increased diversification throughout 2011, favoring more flexible generalist funds in favor of sector or region specific funds. 3 Strategy 4 Hedge funds concluded a challenging 2011 with a decline in December, as the HFRI Fund Weighted Composite Index declined by -0.18 percent, bringing full year 2011 performance to -4.8 percent. Hedge funds produced a gain of +1.3 percent in 4Q11, following a sharp decline of -6.7 percent in the volatile 3Q; hedge funds gained +0.77 percent in 1H11. Fixed Income-based Relative Value was the only strategy area of positive performance for fullyear 2011, gaining +0.55 percent, while Macro declined by -3.6 percent. Two strategy areas ended 2011 with gains in December, including Macro (+0.16 percent) and Relative Value Arbitrage (+0.50 percent) strategies; Event Driven posted a narrow decline of -0.01 percent in December and -2.65 percent for 2011. Equity Hedge strategies were the weakest area of performance for both December and 2011, posting a decline of -0.66 percent in December, and concluding 2011 with a decline of -8.0 percent. Performance of Equity Hedge was undermined by weakness in Energy/Basic Materials, Emerging Markets and Fundamental Growth, which posted full-year declines of -16.75, -12.9 and -12.6 percent, respectively. 1,500,000 1,000,000 500,000 0-500,000 2004 2005 2006 2007 2008 2009 2010 2011 Sector Highlight Performance & Asset Flow per Strategy (MM) 1 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $- $(5,000) $(10,000) 7,400 7,200 7,000 6,800 6,600 6,400 Estimated Assets Estimated Asset Flow Estimated # of Funds Performance Net Asset Flow All major strategies were up for the Q4 led by Equity Hedge, ironically the strategy with the highest net negative asset flows for the quarter. The total industry was up by about $40B. Despite positive performance, the industry saw negative net assets flows of $127M for Q4. Sources: (1) HFR - 2011 Q4 HFR Global Hedge Fund Industry Report ; (2) SEI The Shifting Hedge Fund Landscape January 2012; (3) Brighton House Associates Quarterly Research Report Q4 2011 ; (4) HFRI Monthly Indices - December & Year End 2011" 2
Aggregate Capital Commitments ($B) Number of Funds Private Equity Market Briefing General Trends Investor activism is increasing LP scrutiny of their GPs. The degree of transparency investors now demand, plus their ad-hoc information requests, have outpaced the ability of most firms to easily and quickly respond to investor requests. This has placed an extraordinary burden on the investor relations and financial reporting functions. 1 Private equity funds have outperformed public equities by 3% to 5% per year, after accounting for their higher risk profile. For plan sponsors who can cope with illiquidity, the implication is that they should have a portion of their portfolio allocated to private equity. 2 Companies are again considering private/public markets to raise capital. Third party investment will require more controlled and formalized processes, a more stable infrastructure, as well as more timely delivery and higher quality of information. 1 Given the state of the global economy, there has been an uptick in investor demand for private equity funds due to their low correlation to equity markets and desire for strong rates of return. 3 GPs are employing placement agents to assist in fundraising during this tough fundraising climate. Of the funds to complete their fundraising throughout 2011, 55% enlisted the services of a placement agent. Almost 70% of the funds that used the assistance of placement agent met or beat their target sizes compared to 62% of funds that did not use their services. As for funds currently in market, 42% of funds are using the help of a placement agent. 4 Private Equity Funds in Market by Fund Type 4 Private Equity Fundraising 4 250 200 150 100 50 0 140.8 131.7 213.9 202.8 208.4 168.3 Q2 2006 Q4 2006 Q2 2007 Q4 2007 Q2 2008 Q4 2008 Q2 2009 Q4 2009 Q2 2010 Q4 2010 Q2 2011 Q4 2011 Aggregate Commitments ($bn) 95.4 There was a moderate increase in aggregate capital garnered by private equity funds that closed in Q1 2011 against the last quarter of the previous year; however fundraising remained below the aggregate $78.9bn raised by the 164 funds to close in the corresponding quarter of 2010 and far below the historical peak of $213.9bn collected by the 398 vehicles that closed in Q2 2007. This gradual improvement continued into Q2 2011, when the 190 funds that closed attracted an aggregate $88.4bn from investors, representing the largest total since Q2 2009. 73.7 61.3 No. Funds Raised 55.2 88.4 54.5 500 450 400 350 300 250 200 150 100 50 0 Private Equity AUM by Fund Type 4 There are 1854 funds in market with an aggregate target capital of $758.2B. Private equity real estate focused funds currently constitute the largest number of vehicles in market, with 472 funds targeting just shy of $170B in capital. Buyout funds are targeting the largest amount of capital, with a total of 234 funds aiming to raise $178.5B. Private equity assets under management as of June 2011 increased to over $2.9tn, a new record; more than a third of fund managers with a top quartile fund go on to raise another top quartile successor fund; and the top six most consistent performing venture fund managers are based in the US. Sources: (1 ) PWC 11 th Annual Alternatives Investments Seminar ; (2) BlackRock Do Buyout Managers Add Value ; (3) Brighton House Associates Quarterly Research Report Q4 2011 ; (4) Preqin Private Equity Spotlight 3
Real Estate Market Briefing General Trends Investor Appetite for Real Estate 5 Closed-ended private real estate assets under management globally rose from $413B to $510B between December 2009 and June 2011. The rise in AUM was mainly due to an increase in unrealized value of $131B, despite a decrease in dry powder of $34B. 1 Real Estate is on a gradual but even path to recovery: The drastic drop in development activity amid tight underwriting standards and contracted demand levels has potential to reduce overall real estate activity. REITS outperformed other classes primarily due to higher liquidity, easy access to debt and equity and keen investor interest on the back of low valuations. 2 IPO activity is a mixed bag: Some private firms want to go public to recapitalize more quickly, while other developers and operators with capital problems find it easier to merge into existing REITs rather than jump through hoops of a public offering. 3 REITS have a very good story: Though they behave like stocks more than private real estate, the REIT sector has comfortably outperformed the stock market on various benchmarks. Investors are willing to take on more risk through opportunistic and value-added strategies, but only through well established fund managers with strong track records. 3 Current and long-term historical average income yields for both public and private real estate equity sectors have been much higher than those of bonds and stocks. 4 Real Estate Fundraising 5 Investor appetite for private fund commitments is lower than it has been in the past two years, with just 36% of investors stating that they were likely to commit to funds in 2012, compared to 45% in January 2011 and 47% in January 2010. Larger investors are more likely to commit to private real estate funds in 2012. 51% of investors with more than $10bn in total assets are likely to invest, compared to just 26% of investors with less than $1bn in total assets. Sector Highlight Real Estate Risk-Adjusted Returns 6 2009 and 2010 quarterly fundraising totals were significantly lower than in previous years, and fundraising in 2011 continued to remain depressed. The number of funds closing each quarter declined throughout the year from 34 funds in Q1 2011 to 23 funds in Q4 2011. Although the number of funds closing has declined, the average size of funds closing has climbed from a low of $174mn in Q4 2010 to $434mn in the last three quarters of 2011, indicating that large brand name firms are still experiencing fundraising success in a challenging environment. By way of a backdrop, the first three quarters of 2008 were the most successful quarters for private real estate ever, when 219 funds reached a final close having collected $121.7 bn in commitments, although the aggregate capital raised by funds closed in Q4 2008 was less than half the figure from the previous quarter. Private real estate generated the highest total returns on a risk-adjusted basis among the major asset classes over the last three decades. Many economists believe that the current economy may lead to inflation, and that is a valuable hedge against price inflation Sources: (1) 2012 Global Real Estate Report; (2) Deloitte Commercial Real Estate Outlook ; (3) PWC Emerging Trends in Real Estate ; (4) BlackRock- Alternative Trendsetters ; (5) Preqin Real Estate Spotlight ; (6) ING Clarion Research & Investment Strategy 4
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