Alternative investment assets will increase by 59% to $14 trillion by 2023, alternatives data provider Preqin reported this week.
The number of fund management firms active globally will grow by 21% over the next five years to 34,000.
Preqin based its prediction on surveys conducted in June with 300 fund managers and some 120 institutional investors.
Alternative assets will expand across all assets classes, it said, with smaller ones set for sharper growth while more established ones haul in bigger amounts of capital.
Private equity will slip past hedge funds as the biggest alternative asset class, growing by 58% from $3.1 trillion in 2017 to $4.9 trillion in 2023. Hedge funds will grow by 31%, rising from $3.6 trillion to $4.7 trillion.
Private debt will move into third place, with $1.4 trillion under management, overtaking real estate, which will have $1.2 trillion under management.
Real assets, which make up a tiny 8% proportion of the alternative assets sector, will be the fastest-growing area over the next five years, according to Preqin. Driven by natural resources, real assets will represent 13% of the $14 trillion alternative industry by 2023 with $1.8 trillion.
The infrastructure market will bring up the rear, doubling its assets to $1 trillion by 2023.
Which allocators will be the biggest sources of capital by 2023?
Sources of capital have become more fragmented globally with an increase in the number of sovereign wealth funds and family offices since the financial crisis, Michael Sterling, chief executive of Sterling Infrastructure wrote in the report.
These have become more sophisticated, and have developed greater in-house expertise to run their own investment strategies rather than rely on the larger investment banks or traditional managers, he said.
The Preqin survey showed that fund managers think banks and defined benefit pension funds will be significantly less important sources of capital by 2023.
Could the $14 trillion forecast be too high? Possibly, Preqin chief executive Mark O’Hare said in the report’s introduction, but added, “Preqin will stick with the $14 trillion forecast — but it is more likely to be too low than too high.”
He cited several reasons why the prediction is likely to be accurate. For one, technology, especially blockchain, will facilitate private networks and help investors and fund managers transact and monitor their portfolios, and reduce costs versus public markets.
Futurist Amy Webb recently discussed emerging technology trends with ThinkAdvisor.
O’Hare also noted that investors increasingly want more control and influence over their investments, and the ability to add value, something that private capital provides.
Preqin’s $14 trillion prediction is also likely to be accurate, he said, because emerging markets growth will be a “double whammy” of GDP growth plus deeper penetration of alternative assets. O’Hare pointed out that the Chinese venture capital industry already matches America’s in size.
Then there is the “elephant in the room,” mass affluent individuals around the world who would like to increase their investment in private capital if only the structures and vehicles — and regulation — allowed them to do so. Technology will help, O’Hare said.