Quarterly Alternative Asset Report

Welcome to the Q3 2019 Alternative Asset Report in which we provide an update on the alternative asset markets covered by Mercer’s Alternatives platform (“Mercer”). We will continue to refine this report, with the aim of delivering consistently relevant private markets information to clients. 


 

The U.S. Private Equity Market.
Deal flow in the U.S. Private Equity market continued to be strong in Q3. Fund managers deployed over $168 billion in almost 1,600 companies. Of concern is that median valuations in 2019 have reached an all-time high at 12.9x, driven primarily by a significant increase in the equity component. Also of concern is that exits are running well behind the pace of the last several years with only $195 billion being realized thus far in 2019. Despite this, fundraising is brisk with over $86 billion raised in Q3 alone, the strongest quarter of any quarter in over five years.

The U.S. Venture Capital Market.
U.S Venture Capital fund managers have also been actively investing and are on pace to match last year’s high deployment rate. In Q3, over $28 billion was invested in almost 2,200 companies. In contrast to U.S. PE, U.S. VC’s have been very successful in generating exits and have already far exceeded the annual level for 2018, generating over $227 billion thus far although the third quarter was the slowest of 2019. These exits have attracted investors, with fund managers raising $9 billion in over 50 funds in Q3, a solid but not record setting amount.

The European Private Equity Market.
Despite the Brexit uncertainty, the European Private Equity market saw some recovery in deal flow in Q3 with over €122 billion invested in the quarter. Despite the increased investment activity, valuation multiples remain low at 8.9x. Exits, however, remain supressed with only €42 billion being realized in Q3, placing 2019 at the slowest exit pace in over five years. Fundraising has also been slow in 2019 for European fund managers, only €10 billion was raised in Q3 bringing the total for 2019 to just over €51 billion.

The Asian Private Equity Market.[1]
Asia has experienced a significant decline in investment activity with only $102 billion being deployed through Q3. Exit activity has endured an even greater struggle with realizations of only $41 billion, a 59% decline relative to 2018. However, while fundraising is also down, it has not declined as much. Over $73 billion was raised through Q3 which is only a decrease of 14% versus 2018.

The Natural Resources Market.
Fundraising in the Natural Resources market has also been slow with 18 funds raising just over $8 billion, the slowest quarter in over five years. Over the quarter, energy prices did not show much movement. Timber continued its multi-year pattern of generating low but consistent returns. Precious metals, on the other hand, experienced significant increases in prices over the quarter.

The Infrastructure Market.
In the Infrastructure market, the number of transactions are comparable to Q3 2018 while the amount of capital deployed is slightly below at $88 billion. In Q3, 19 funds raised over $8 billion, significantly below the amount raised in the corresponding quarter in 2018. However, a greater percentage of funds are reaching their final close within two years of launching.

The Private Debt Market.
Fundraising the Private Debt market has also slowed with 24 funds raising $22 billion in Q3. Most of the capital raised was by direct lending funds. Despite the challenging fund raising market, European funds were able to raise $14 billion for 8 funds.

The Real Estate Market.
In the U.S. demand for space has been positive but there are signs it is moderating. Canadian investment volumes have slowed in Q3 but remain above average. In the U.K, there has been an inversion of the yields in the industrial and retail markets. Prime real estate yields in Europe have fallen to record lows. In the expensive Asian markets, yields have remained flat. Finally, in Australia, there is strong investor demand for commercial real estate.

The Hedge Fund Market.
While assets under management are near all-time highs, hedge funds experienced modest outflows in Q3. In Q3, hedge funds underperformed both equities and bonds, however most strategies protected capital in the August market selloff. Of the various strategies, macro had the best performance over the quarter. 

For more insights, we invite you to download the report.

[1] Statistics on Asian private equity markets are released semi-annually rather than quarterly as in other private markets.