Alternative Investments 2020: The Future of Alternative Investments

October 2015Alternative Investments 2020 The Future of Alternative Investments B Alternative Investments 2020: The Future of Alternative InvestmentsWorld Economic Forum2015 – All rights reserved.No part of this publication may be reproduced or transmitted in any form or by any means,including photocopying and recording, or by any information storage and retrieval system. Alternative Investments 2020: The Future of Alternative Investments 1Executive summaryContentsExecutive summaryIntroduction and scope41. Macro trends81.1.The growing influence of the developing world131.2.Social systems and their sustainability151.3.Monetary policy172.Ecosystem changes181.1.Financial services regulation202.1.1.Bank regulations212.1.2.Investment regulations222.2. Institutionalization222.2.1.Drivers232.2.2.Impact252.3. Retailization252.3.1.Drivers 262.3.2.Impact283. The evolving alternative investment landscape 293.1. New business models for alternative investment firms303.1.1.Global alternative asset managers323.1.2.Specialists (regional or sector)323.1.3.Retail alternative investment managers333.1.4.Start- up firms333.1.5.Funds of funds343.2. New relationship models for asset owners and managers373.2.1.Direct investing393.2.2.Co- investing403.2.3.Joint ventures413.2.4.Separately managed accounts453.3. Rising impact of retailization 453.3.1.Implications for alternative investment 453.3.2.Implications for asset managers 463.3.3.Implications for banks473.3.4.Implications for retail investors473.3.5.Implications for regulators48Conclusion and key implications50Appendix: Additional readingWorld Economic Forum and related research papersOther research papers51Acknowledgements52EndnotesThis report examines the forces driving today’s alternative investment industry and considers where these may take the industry in the coming years, focusing on the core asset classes of private equity buyouts, hedge funds and venture capital.Alternative investment has matured over the last 30 years and is gradually becoming part of the mainstream financial industry, garnering greater attention and acceptance from both regulators and the general public. However, it is also entering a period of considerable growth and change due to the influence of macroeconomic drivers, post-crisis financial industry regulation, and two critical industry trends: the increasing sophistication of institutional investors and the rise of retail investors as an important source of capital.The most fundamental macroeconomic driver is the rise of emerging market economies. They generate new investment opportunities and serve as an increasingly important source of capital. At the moment, most emerging market capital flows into alternatives via sovereign wealth funds (SWFs), but the growing number of high net worth individuals in emerging markets – and their openness to alternative investing – will soon become important. Demographics in the developed world are also critical, as the rising tide of pensioners is leading to a growing funding gap in retirement systems. With the leading central banks likely to keep benchmark interest rates near zero for the foreseeable future – ensuring low returns from fixed-income investments – many pension funds are increasing their allocations to higher return alternative investments.Meanwhile, post-crisis regulatory reforms intended to improve the stability of the global financial system are creating both challenges and opportunities for alternative investors. Bank capital, liquidity and collateralization reforms have discouraged banks from holding many alternative assets on their books and from lending short-term money to fund some alternative investments (e.g. hedge fund strategies). New regulations aimed directly at the investment and alternatives industry are also requiring firms to improve their infrastructure, transparency and reporting and are speeding up the maturation of the industry. However, the cost and complexity of the new laws is creating barriers to entry for the industry which may reduce innovation in ways that drag down the long-term returns available to investors critical to society, such as pension funds. Institutional investors are presently the main supplier of capital for alternatives, and their growing confidence and investment capabilities after investing over multiple economic cycles – a complex phenomenon known as “institutionalization” – is a key driver of many future trends in the industry. The process has helped to increase both the size of the industry and its importance to wider society. However, an even more fundamental change in the retirement sector, the shift from defined benefit to defined contribution pensions (where investments are controlled by individuals), may lead to a significant influx of retail capital into the alternatives sector. This “retailization” trend will be a key driver of growth in the alternatives industry in coming decades, a