The bear market and crypto fall of 2022 made for a rough economic stretch last year, but there is plenty to be optimistic about especially in the alternative investment space for the rest of 2023.
By Chris Pallotta, founder and CEO of Templum Inc.
Investments in alternative assets certainly aren’t novel, but they have risen significantly in popularity since the economic downturn of 2008. The performance of public markets in 2022, coupled with rising inflation and interest rates, has likely served as a catalyst driving investors to rebalance their portfolios via alternatives. However, market performance aside, the diversification trend will continue in 2023.
Many foresee 2023 to be a big year for alternative investments rather than traditional public equities. In fact, 67% of institutional investors said they expect a portfolio including 20% alternatives to outperform a traditional 60/40 investment mix.
Here are a few predictions for alternative investments as we head toward Q2 2023.
Commodity trading will enter its next normal
The commodity trading industry has continued on an upward trend over the last five years, and the outlook for the rest of 2023 continues to be excellent. Recently, commodity trading has started moving toward what the new normal for the industry is going to be in the future.
Several factors including the energy transition and decarbonization, trade flow disruptions like COVID-19 and the war in Ukraine, and a dramatic rise in overall liquidity is reshaping what commodities trading looks like. Although these factors will likely create challenges such as increasing structural volatility, redefining what it is to be a commodity and altering commercial relationships on a fundamental level, it also creates new opportunities, both for traditional players as well as new ones coming in.
Multifamily commercial real estate properties will continue to perform well
Of all asset classes, multifamily real estate is one of the highest performing. In Q3 of 2022, multifamily vacancies were at a five-year low at just 4.4%. While some factors that were a big part of the increase of multifamily housing during the pandemic have subsided, the persistent housing shortage and high demand for suburban homes has not.
Several U.S. markets have an undersupply of housing due to the under-delivery of new housing, which has only gotten worse in the last decade. Additionally, continuously rising rent rates because of that demand provide even more lucrative options for real estate investors. The recent swing in higher interest rates across the board does not have the same effect on a well-managed real estate portfolio because of fixed rates that were already locked in.
Commercial real estate investing has also recently become more readily available to investors at all levels, who can access the market by buying fractional shares on investment platforms.
Secondary trading moves to the forefront
According to Ernst & Young, global IPO volumes fell 45% year-over-year in 2022. Although there has been a recent uptick in the number of companies going public over the last few months, some economists believe the greater trend is here to stay.
Because of this, shares of strong private companies are being sold in the secondary trading market. More and more sellers are coming to terms with the fact that if they want liquidity, now is the time to sell in the secondary market as they will likely not see valuations like they did a couple of years ago any time soon. In fact, many are trading at 40-60% discounts relative to 2021. With a huge demand for liquidity from LPs looking to do something else with this money, the private equity secondaries market is primed to boom in 2023.
Alternative investment growth is on the rise
Preqin shared that the total dollar value in alternative asset classes more than doubled between 2015 and 2021 and is forecast to reach $23 trillion by 2026. Other trends we may see this year include large investments into green energy and institutional investors moving to alternative assets in a more formal manner, bringing alts into the mainstream.
While many experts see a looming recession, there is plenty to be bullish about for the rest of 2023 in the alternative investment space. Over the rest of the year, trillions of dollars will change hands, and we look forward to diving further into these trends and sharing more stories with you.