Alternative Investment

Liquidity crunch is stalling fundraising; hot sectors cool

In 2023, real estate investment trusts that were battered in 2022 could stage a comeback, making them a more attractive choice for investors, said Mathew Kirschner, portfolio manager, U.S. real estate at Cohen & Steers Inc.

“It comes down to what is being priced into different markets,” Mr. Kirschner said. “The REIT market … has priced in two things: the increase in interest rates” and the prospect of slower growth.

Going forward, REITs should again offer above-average dividend yield and long-term returns, he said. REITs also helps diversify investors’ portfolios with easy access to next generation asset classes such as cell towers, data centers and single family homes for rent, he said.

“Investors have access to a lot of different asset classes they can’t access elsewhere,” he said. Cohen & Steers had $29 billion of institutional assets under management in REITS and $3.9 billion in infrastructure as of Sept. 30.

Greg Olafson, co-president of the alternatives business at Goldman Sachs Asset Management, said that “without question” it will be more difficult to raise new capital. But, he agrees that the funds that will be raised will tilt toward infrastructure, credit and to a less extent, real estate, he said.

“Real estate will take longer to work through because it is a rate-sensitive product,” Mr. Olafson said.

While infrastructure, credit, energy transition and digital transformation assets will be affected by the economy, they are supported by “strong secular trends in an inflationary environment,” Mr. Olafson said.

Despite secular trends that support these assets in the long term, some of the hottest infrastructure sectors such as communication infrastructure, cell towers and data centers may continue to underperform in 2023, said Tyler Rosenlicht, Cohen & Steers’ senior vice president, a portfolio manager for global listed infrastructure and head of natural resource equities.

These are high growth businesses and rising interest rates have a greater impact than on slower growth companies, Mr. Rosenlicht said.

And while cell towers and data centers are long-term infrastructure assets, “they are very tethered to the tech world,” he said.

“I think a lot of the tech industry was focused on revenue growth and not profitability and free cash flow growth,” Mr. Rosenlicht said.

Now that the tech industry’s focus has shifted to profitability, tech companies are likely to be more guarded on spending, causing a cut back on the number of data centers they add, he said.

These factors could cause cell towers and data centers to post lower growth than expected 18 months ago, Mr. Rosenlicht said.

Across alternatives, the slower fundraising in 2023 will divide managers between the haves and have nots, said James Clarke, a managing director at Blue Owl Capital Inc.

Asset owners will have less capital to commit and so will concentrate their investments to a fewer number of alternative investment managers, Mr. Clarke said.

While private credit outperformed public debt in 2022, if interest rates continue to climb in 2023, an argument could be made to decrease private credit allocations in favor of publicly traded fixed income, he said.

Even so, the credit asset class was battle tested during the market volatility blip at the start of the pandemic, and private equity firms are sitting on $1.5 trillion of dry powder and will need loans that are now mostly available from private debt lenders, Mr. Clarke said.

However, private market managers may not invest that dry powder just yet. The anticipated result of the rocky fundraising trail in 2023: Many managers may be in no hurry to invest the capital they already have and take full advantage of funds’ typical five-year investment period.

The capital that is on the sidelines in the form of dry powder “could remain on the sidelines,” said Willis Towers Watson’s Mr. Bragar.

“There’s been horror story after horror story of GPs not able to raise funds,” he said. “Let’s say you’re a GP and hear your GP friends are in the market for nine months, a year or more than that and unable to hit their targets. Will you be willing to deploy funds that quickly thinking you may run into the same issues?”

Managers that invest at a slower pace could still charge management fees on un-invested capital and wait for fundraising to pick up, Mr. Bragar said.

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