October 7, 2024
Embracing Alternative Investments: The New Frontier for the Younger Generation
Understanding Alternative Investments
Alternative investments encompass a diverse range of assets outside conventional categories, including real estate, commodities, hedge funds, collectibles, and notably, private equity. Unlike public market investments, alternative options often offer different risk-return profiles and lower correlations with traditional asset classes, making them attractive for those seeking to diversify their portfolios.
Private equity involves investing directly in private companies or acquiring public companies to delist them. This sector has seen significant growth, promising higher returns than traditional investment avenues. According to Preqin, the global private equity sector managed around $4.5 trillion in assets as of 2024, indicating a robust acceptance and confidence among investors. Some interesting facts about alternative investments are:
- There is a rising Interest: A 2021 survey by Deloitte found that 60% of millennial investors are considering alternative investments as part of their portfolios and,
- Portfolios with PE investments have diversification benefits: Studies suggest that including just 5% to 10% of alternatives in a traditional portfolio can enhance returns and reduce overall risk.
The Rise of Private Equity
In recent years, private equity has become a popular choice among young investors. Reports indicate that private equity assets under management (AUM) rose to $4.5 trillion in 2024, marking a substantial increase over the past decade. This growth reinforces private equity’s appeal as an investment vehicle, particularly for those seeking higher returns.
Why the Younger Generation is Attracted to Alternatives
Several factors contribute to the younger generation’s interest in alternative investments these include among others:
- Potential for Higher Returns: Private equity investments often yield greater returns than traditional public equities. According to Cambridge Associates, private equity has consistently outperformed public markets over the years, providing a compelling argument for diversification.
- Aligning with Values: Many young investors prioritize investments that reflect their values, such as sustainability and social impact. Private equity firms increasingly focus on Environmental, Social, and Governance (ESG) criteria, attracting socially conscious investors.
- Access to Unique Opportunities: Alternative investments, particularly private equity, provide access to exclusive deals and emerging companies that can drive substantial returns.
Growth of Alternative Investments in South Africa
Interest in alternative investments within South Africa is increasing. According to the Association for Savings and Investment South Africa (ASISA), assets under management in the local private equity sector grew significantly, reaching over R199 billion in 2021. From 2022 to 2023, these assets rose from R213 billion to R237 billion, reflecting an annual growth rate of approximately 11%. The sector has shown resilience, attracting investments even during economic downturns. Recent trends indicate a shift from generalist investments to those focused on infrastructure and energy, aligning with the challenges faced by South African businesses and citizens.
A 2023 survey by the African Private Equity and Venture Capital Association (AVCA) revealed that South African private equity professionals remain optimistic about growth prospects, highlighting a strong belief in alternative assets.
Performance of Alternative Investments
Alternative investments have historically performed well, particularly in volatile market conditions. In South Africa, private equity funds have reported internal rates of return (IRR) averaging around 15% to 20%, often outperforming traditional public equity markets. However, it’s crucial for young investors to understand the risks involved, as private equity tends to require a longer investment horizon and can lack liquidity compared to public investments.
The rise of open-ended private equity portfolios
Open-ended private equity portfolios are investment vehicles that allow continuous fundraising and provide investors with the flexibility to enter and exit the portfolio over time, as opposed to the traditional private equity funds that have fixed lifespans and close-ended structures. This mode of private equity investing is becoming more popular, especially as investors seek to balance long-term growth with some degree of liquidity in private market exposure.
Conclusion
Investors across the board and in particular younger investors, increasingly lean toward alternative investments, private equity stands out due to its potential for higher returns and its role in supporting essential sectors of the economy, particularly SMEs and businesses in need of funding to grow or expand.
Open ended private equity portfolios, such as the Aluma PE Growth Portfolio or the Aluma PE Income Portfolio, allow investors (both established and first-time) the ability to participate in this sector at a lower entry level and with greater flexibility.
By diversifying into these asset classes such as private equity and “alternative investments”, the younger generation can enhance their financial portfolios and contribute to broader economic growth and innovation globally and in emerging markets like South Africa and other countries on the African continent. Understanding and leveraging alternative investments will be key to securing a prosperous financial future as both domestic and global markets continue to evolve and access to finance, opportunities, growth and wealth creation become increasingly important and sought after by young- and old investors alike.