This Q&A was featured in Pitchbook’s Q1 2025 U.S. PE Middle Market Report. A Pitchbook subscription is required to read the full report.
What is driving growth in the alternatives sector?
Alternatives typically include hedge funds, private equity (PE), real estate, venture capital (VC), private credit and other fund management strategies. According to industry reports, assets under management (AUM) in the private markets (including evergreen funds) reached $18.7 trillion in 2024. Several factors are driving growth in the sector, including:
Enhanced Investor Accessibility
- Emerging Managers and Assets: Emerging managers are key drivers of growth in the sector. They bring new perspectives, challenge conventional thinking and embrace innovation, including the launch of new asset classes such as fractionalized assets, cryptocurrency and non-fungible tokens (NFTs).
- Strategy Specialization: The emergence of new asset classes and niche markets creates opportunities for fund managers to tap into often less crowded spaces. For instance, a manager might specialize in a technology subsector or a type of real estate in an underserved geographic region.
Performance and Risk Mitigation
- Higher Returns: In an unstable rate environment and fluctuating public markets, investors are increasingly looking to private markets for potentially higher returns and diversification benefits. Historically, alternatives such as PE and VC have shown favorable returns over longer periods compared with public equities.
- Desire for Greater Diversification: Alternatives often exhibit lower correlation with traditional public market assets, offering investors a way to diversify their portfolios and reduce overall risk.
- Pension Fund Allocations: Institutional investors, such as pension funds, are increasing their allocations to private markets in search of long-dated, profitable assets to match their liabilities.
How are technological innovations playing a role in the sector?
Innovations such as blockchain, AI and automation are significantly reshaping the investment opportunities landscape.
Blockchain and Smart Contracts
Blockchain is revolutionizing the way assets are tokenized and traded. Smart contracts powered by blockchain technology can also enhance transparency and efficiency in investment transactions, reducing the need for intermediaries.
- Digital Assets: Blockchain underpins cryptocurrencies and other digital assets, such as Bitcoin and Ethereum, which have demonstrated significant growth, attracting investors seeking higher returns, despite volatility.
- Tokenization: Blockchain enables the tokenization of assets such as real estate, art and commodities, making them more accessible and liquid, opening investment avenues in previously illiquid markets.
- VC and Blockchain Startups: Investing in early-stage blockchain and cryptocurrency startups can yield high returns. VC firms specializing in blockchain offer a way for investors to gain exposure in this space.
AI and Automation
AI algorithms can sift through vast amounts of data from various sources to assess companies, industries and market trends. This enables the identification of potentially high-value investment opportunities and undervalued assets, offering a competitive edge.
- AI-Driven Companies: Investing in companies that develop and implement AI technologies across various sectors, such as healthcare, finance and transportation, offers exposure to significant growth potential.
- Software and Platforms: Investing in companies providing AI software, machine learning platforms and data analytics tools presents opportunities as AI adoption increases across industries.
- Automation Technologies: Companies specializing in robotics, industrial automation and process automation offer investment opportunities as businesses seek to improve efficiency and reduce costs.
What are the key challenges facing the industry?
Amid an uncharted technology territory and uncertain economic posture, the alternatives sector faces a myriad of challenges, including increased regulatory and compliance scrutiny.
- Regulatory: Compliance requirements create complexities for asset managers in terms of reporting, transparency, controls and operational efficiency. While private funds operate under a different regulatory framework than public funds, regulators are addressing the growth and accessibility of private markets through disclosure requirements, antifraud provisions, and other compliance obligations.
- Cybersecurity: Funds are known to house important and confidential investor information, which positions them as targets for hackers. Threats, data privacy concerns and algorithmic biases are some of the challenges that investors must navigate in the age of digital innovation.
- Technology Risks: While blockchain and AI are exciting and exhibit massive growth potential, uncertainty around legal frameworks, data integrity, transparency, and other operational challenges contribute to a high-risk environment.
- “Retailization” of Private Funds: Regulatory changes are facilitating the creation of registered investment companies that can hold private fund assets, allowing retail investors access to these opportunities while adhering to current regulations. Retailization, however, presents challenges related to investor protection, regulatory inadequacy and the potential for systemic risk.
- Market Volatility: Anticipated trade and tax policy changes will challenge asset managers to adapt their investment strategies to respond to macroeconomic uncertainties and capitalize on emerging trends in a rapidly changing investment environment.
What is your view of the future of the alternatives sector?
There are favorable growth trends for the sector, particularly as new asset classes emerge, innovation and technology progress, accessibility for new fund managers increases, and investors look to hedge against market volatility and seek greater returns.
We may continue to see this evolution bob and weave during times of economic uncertainty, but we do not expect any wild divergence from the overall growth trajectory.
Your Guide Forward
Whether you're exploring emerging asset classes, implementing innovative technologies, or addressing regulatory hurdles, Cherry Bekaert’s Asset Management professionals serve as your trusted advisors in navigating the alternative asset industry. Contact us today to leverage decades of experience and keen business acumen and advance your investment strategies with confidence.
