Welcome to the 2Q2020 Alternatives reports which summarizes our views on the major Alternative Asset classes. They are provided for discussion purposes and do not provide any assurance or guarantee of future market returns. We do not expect clients to use this as a recommendation for Asset Allocation.
Please note the content is for FOR INSTITUTIONAL INVESTORS USE ONLY.
The U.S. Private Equity Market.
US Private Equity saw a record year for fundraising, backed by mega deals. Investment activity was strong in 2019, however, it will likely be subdued due to COVID-19. Exits have seen a decline in 2019 and valuations are expected to drop over 2020.
The U.S. Venture Capital Market.
US Venture Capital investment activity remained elevated in 2019. The sector had strong exit activity in 2019 and consequentially, saw a record year in funds raised mainly because of recycling. However, we expect the valuations and investment activity to decline in 2020.
The European Private Equity Market.
European Private Equity had a strong fundraising year in 2019. However, investment activity, exit activity and valuations were lower because of the political uncertainties. Dry powder has increased and valuations are expected to decline further due to COVID-19.
The Asian Private Equity Market
Asian Private Equity was sluggish throughout 2019 in terms of investments, exits and fundraising. The COVID-19 pandemic is expected to worsen this situation in 2020 since China accounts for a large part of this market and other Asian countries are trade partners.
The Natural Resources Market
The majority of capital raised in Natural Resources was in Energy. US oil production was at an all time high in 2019. However, demand is suppressed and there is excess supply due to the Saudi Arabia/Russia dispute. Timber had the worst return in a decade. Precious metals were bullish in 2019 whereas base metals rose less due to the US-China trade war.
The Infrastructure Market
For Infrastructure, Q4 was the strongest of the year for both deal flow and fund raising. Notably, Global Infrastructure Partners IV ($22 billion) closed on the largest infrastructure fund raised to date.
The Private Debt Market
Private Debt fundraising and investment activity declined sharply in 2019. Mercer expects increased investor appetite for Asset-Backed Credit and Specialty Lending strategies as well as open-ended Funds. There is the potential for increased payment defaults with lower recovery rates in the short to medium term due to market volatilities.
The Real Estate Market
In Real Estate, vacancy rates remained low in North America. Distressed buying opportunities may arise in Europe in 2020. Assets leased to government backed tenants may remain attractive in the UK. In Asia, opportunistic strategies may do well.
The Hedge Fund Market
Despite challenged absolute returns across most strategies, returns relative to equities were attractive, with most hedge fund strategies outperforming global equities for the quarter and over the past year. Dispersion of manager returns during such environments can be quite high. Macro and trend following strategies fare better with liquid, developed market focused strategies best positioned to do well.