Chart of the Month: January 2023

Alternatives in Private Equity: Examining the Smaller-Exposure Investment Strategies 

As institutional investors review portfolio makeups amid tight economies worldwide, we examined Cobalt Market Data to identify trends in alternative private equity strategies over the past 30 years.  

Specifically, we looked beyond traditional alternative investment styles such as buyout, venture, and real estate and focused on data from infrastructure, natural resources, secondaries, co-investment, and fund of funds investments in developed markets.  

As shown in the following chart, we also examined the alternative diversification trend through average commitment sizes. 

Key Takeaways:

• Since the mid-1990s, there has been a steady growth trendline in average ticket sizes for these alternative investment strategies. While the growth-to-contraction economic cycles have been more significant during macro events such as the dot-com bubble and global financial crisis, the trends are not a 1:1 match to the movement of the public markets. This indicates additional growth factors—the largest from the expansion of portfolio allocations to alternatives, based on our research.
• Alternative investment strategies experienced more accelerated growth. The average ticket size grew from $36 million in 2000 to $84 million in 2020, compared to $50 million to $85 million for traditional styles in the same periods, respectively. Beyond allocating a larger piece of the pie to alternatives, the average LP is also looking to diversify with larger checks to other investors with diversified alternative portfolios.
• Over the past half-decade, growth of the average commitment size has plateaued between $75 million – $85 million. This is not necessarily an indicator of a downturn. Rather, it may be linked to overall fund sizes being smaller, on average, in alternative investment styles compared to traditional styles such as buyouts, for example.  

Looking Ahead:

• As demand and fund sizes continue to grow in alternative investment styles, average commitments might resume an upward trajectory in the years to come. For example, our dataset over nearly three decades shows 250 funds have raised over $2 billion in these styles, with 195 of them in the past 10 years. This indicates the upper end of alternatives is growing to meet more LP demand, which should lead to a sustained rise in average commitments.
• One variable to watch across the alternatives space is the impact of an inflationary environment on overall commitments. The last period of high inflation in the early 1980s precedes the chart’s time range, so only time will reveal the impact of the current inflation cycle.