HNWs areincreasinglylooking at alternative assets such as private equity and private debt to offset lower returns in traditional equity and bond markets, according to research by investment manager Connection Capital

A survey of 1,200 HNWs carried out by Connection Capital found that the proportion of investors allocating a fifth or more of their portfolios to alternative assets rose from 26 per cent in 2018 to 41 per cent this year.

Meanwhile, one in three HNWs surveyed is planning to increase exposure to alternative assets, compared to just one in seven for quoted equities.

HNWs’ acceleration towards alternatives is reflected in the growth of private markets around the world. Last year, PWC reported that it expects assets under management in private markets to increase by around $5 trillion by 2025 to around $15 trillion. Meanwhile, in a 2021 survey of 2,500 UHNW investors, EY found that more than four-fifths were tapping into alternative investments.

This momentum has been compounded by adverse economic conditions. ‘Inflation, rising interest rates, recessionary fears and geopolitical risks have re-ignited turbulence in global equity and bond markets and the conventional wisdom that a 60/40 equities/bond split is a safe diversification play – which has been doubtful for some time – no longer rings true,’ said Claire Madden, managing partner at Connection Capital.

‘The private capital community is questioning where they can find the best performance and generate outsize returns,’ Madden continued. ‘The answer for growing numbers of savvy high net worth investors is to turn to the alternative markets.’

‘Private investors are particularly on the lookout for investments where returns are capital in nature, and where there is scope to be opportunistic, for example, where market volatility has had an impact on pricing.’

According to the survey, seven in ten HNWs opt for alternative assets owing to their ‘superior returns and diversification’.

The survey also found that private equity is the most sought-after asset 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.

One of the main reasons for HNWs’ enthusiasm for alternative assets may be the reputation private equity enjoys as being top-performing asset class. 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 per cent. 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.

Madden explains that ‘since many private investors have created significant wealth by running successful businesses themselves, and due to its consistently impressive performance, private equity is often a frontrunner when it comes to considering which alternative assets to invest in’.

‘However, we are also seeing a lot of open-mindedness about options such as private debt, commercial property, infrastructure funds and other alternative fund strategies as the opportunity set and value proposition become clearer and investors get more comfortable with the idea of branching out.’