An increase in allocations to alternative investment strategies – including real estate, private equity, infrastructure, private debt and hedge funds – is being seen among Canadian institutional investors, according to a new study by Toronto-based asset servicing firm CIBC Mellon.
The report – The Race for Assets: Canada vs the World – finds that among different alternative sub-asset classes, real estate (42 percent) is most favored among Canadian investors, followed by infrastructure (20 percent), private equity (18.7 percent), private debt/loans (17.9 percent) and hedge fund investments (1.4 percent).
Private equity leads the way for satisfaction, with 47 percent of respondents saying performance exceeded expectations, and the remainder finding the class performing as expected.
‘Alternatives continue to gain momentum among Canada’s institutional investors as they seek investments that can shelter their capital from short-term risks and market movements while also generating strong returns, though we are seeing Canadian investors becoming more particular about how they deploy their capital,’ says Jon Lofto, director of alternatives at CIBC Mellon.
‘Canadian investors are seeking increased transparency through the adoption of new technologies, which suggests a growing need for advanced analytics and big data to support the decision-making process as well as a desire to deliver returns while considering ESG factors.’
Key findings include:
- More than half (58 percent) of respondents expect allocations to alternatives among Canadian investors to increase over the coming 12 months – a higher portion than global peers
- The most significant trends foreseen in the alternative asset space over the coming year are lower fees to investment managers (30 percent), the rise of technological innovation delivering increased transparency to investors (28 percent) and increased focus on ESG (22 percent)
- Forty-eight percent of respondents indicate they will focus more on fund managers that take ESG factors into account over the next 12 months
- While real estate currently accounts for the largest proportion of Canadian investors’ alternatives exposure, it also has the lowest levels of satisfaction with performance: just 12 percent of investors say real estate performed ahead of expectations, while 30 percent say performance was worse than expected, paving the way for greater diversification across classes and regions
- Canadian investors believe the main features distinguishing them from global investors include a higher priority on co-investment and direct investment (50 percent), greater tolerance of investments requiring long hold periods (40 percent) and a greater emphasis on the use of technology to lower costs (38 percent).
‘The sustained growth in Canadian investors’ allocations to alternative assets will continue to be supported by new products and strategies,’ says Ronald Landry, head of product and Canadian ETF Services at CIBC Mellon. ‘Accessing alternatives can be complex and challenging, and demand continues to grow for solutions that provide exposure to alternatives for investors across the spectrum of size and sophistication.’
Respondents to the study had a minimum of $330 mn in assets under management and a median of $3.2 bn.
