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Alternative Asset Funds Market Commentary Q4 2019

3 December 2019

"Cashflow generation is the name of the game" - Lorna Robertson, Head of Funds at Connection Capital.

  • Hunt for yield becoming more heightened
  • Wider appreciation of closed ended fund structures as liquidity issues come under scrutiny
  • Good choice of global product across almost all sectors
These are interesting times in the funds space. While traditional, retail focused fund managers are grappling with downward pressure on fees and the shift to cheaper passive strategies, plus questions around liquidity in the fallout from the Woodford collapse, our market niche has its own unique dynamics. We are seeing strong demand for a differentiated, specialist approach and a wider appreciation of the value of closed ended fund structures, where appropriate, and where investors are prepared to be patient with their capital. Moves towards de-risking out of equities is pushing interest in alternative asset funds higher and is creating a broader outlook in terms of the types of strategies investors will consider. And as low interest rates may decrease further, alongside continued global growth uncertainty, the demand for yield and for returns less correlated with the main markets increases.

Cash considerations

With this in mind, selecting opportunities where stable cashflows are locked in and creating the right mix of long- and short-dated cash strategies, are top priorities for us, along with continuing to offer a truly diverse range of fund options that are, where possible, uncorrelated to traditional markets and/or can take advantage of the current environment.

Despite the macro-economic headwinds, we are seeing a good flow of high-quality opportunities on a global level across all sectors. While Brexit and regulatory issues may hit certain sectors such as UK small and micro-caps in the short term, many strategies and geographies seem relatively unaffected by the vagaries of the wider climate.

This year, we’ve added a spread of high-quality funds across different sectors to our portfolio. This includes: the BCI Credit Opportunities Fund (provides loan capital to digitally enabled alternative finance platforms and is delivering net returns of around 12% a year to investors); LSP 6, a life sciences ventures fund; TriSpan Opportunities Fund (mid-market private equity strategy) and Permira Sigma V (a collatorised loan obligation (CLO) equity fund) amongst others. Through our relationships with fund managers, we’ve also been able to offer a number of co-invest direct private equity opportunities to our clients.

2020 outlook

Despite high valuations, pockets of opportunity exist in small/mid-market private equity funds where there is a well-defined strategy and an excellent fund manager track record. Specific geographies or sectors, where growth is strong and/or which are overlooked by larger private equity players, are fertile ground.

Venture capital funds (particularly very early series-A investments in areas like cybersecurity or fintech with a global reach) are a possibility. However, with a plethora of opportunities currently on the market, it pays to be super-selective about stage, sector, scope and manager.

In terms of credit funds, multi-sector strategies that can take an opportunistic approach to seek out best value for investors are particularly attractive at this point in the credit cycle. Distressed debt/special circumstances funds that take advantage of market dislocation are also on our radar.

Asset-backed infrastructure funds are sound, cash-generative options. Even better if they can benefit from tapping into the “sustainability” or ESG (Environmental, Social and Governance) zeitgeist, for example, if they operate in the clean energy space.

Meanwhile, commercial property is an obvious yield-generator, but now more than ever, real estate funds must offer something value-add that private investors couldn’t otherwise access.

This is an unprecedented period for hedge funds in which market conditions are proving very challenging for some. While the asset class will undoubtedly rebound, it’s unclear at this stage which strategies will be the best performers going forward, so for now, a wait and see approach is sensible.

Esoteric options like fine wines, art, stamps or music royalties may come into play, but these can be very complex to structure appropriately, requiring highly specialist skills on the part of the fund manager, and would, therefore, be approached with caution.

Co-investment opportunities for our clients to invest direct in portfolio businesses of specific funds will continue to be offered, as our relationships with key fund managers develop and grow.

Beating the market

Ultimately, while most of our investments are not sensitive to market cycles, of course we still have to work within them. We believe that the best way to meet clients’ needs and deliver risk-adjusted returns today is by offering access to cash-generative and/or uncorrelated opportunities across a range of asset types, strategies and fund managers, with a relentless focus on quality and distinctiveness to pique investors’ interest. There are some exciting options out there, both in our core areas of interest and in some more unusual sectors, so 2020 should have plenty to offer clients.

Lorna Robertson, Head of Funds - December 2019

 Russell O'Connor
07760 282 586 or Email

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