Alternatives asset class fundraising dampened in 2023​

By Jake Rickman​

What do you need to know this week?

The FT published an article yesterday detailing the slowing growth of the so-called alternative investment fundraising market. Fundraising is down 23% across the board compared to this time last year, from $1.02tn down to $740bn.

Alternative investments describe investment opportunities in asset classes outside of public equities and government and corporate bonds.

This generally includes:
  • Private equity;
  • Hedge funds;
  • Private credit; and
  • Real estate.
Until recently, alternative investment fundraising dominated the wider investment markets. This was because these investments offered the highest returns in a market characterised by low interest rates. As a result, institutional investors like pension funds and insurance providers increased the percentage of the total capital they invested in alternative assets in what was known as “yield chasing”.

As the FT notes, this marks a slowdown in what was last year a market forecasted to double between 2021 and 2026.

Now that interest rates are higher, institutional investors can eek out higher returns from more traditional asset classes like corporate and government bonds, which was unachievable before the interest rate hikes began at the end of 2021.

For similar reasons related to risk, institutional investors have regulatory limits on the total share of their capital invested in alternative asset classes. Last year’s equity market sell-off now means that these investors are over-exposed to alternative assets, preventing them from participating in new alternative investment fundraises.

Why is this important for your interviews?

Understanding the dynamics that influence alternative investment fundraising is important, especially if you are interviewing with City firms known for their work advising financial sponsors (e.g. private equity and private credit funds). This is because fundraising is the first step in the life-cycle of investment activity.

It follows that declining volumes of alternative investment fundraising means there will be less capital than previously forecasted to deploy on private equity and private credit opportunities. This is less than favourable news for corporate/M&A groups, which benefited from rocketing private capital investments in recent years.

How is this topic relevant to law firms?

Law firms known for their alternative investment fundraising work include Paul Hastings, Kirkland & Ellis, Latham & Watkins, and Simpson Thacher & Bartlett.

Unsurprisingly, many of these firms also work closely with private capital funds that deploy their funds on investment opportunities.

Declining fundraising volumes may likely translate to lower deal volumes. This would decrease the revenue these firms bring in, threatening their profit margins.