Multi-asset strategies are the best bet for investors

Global players are seeking innovative ways to get returns.

Despite the mainstream media's ongoing negative narrative on the global economy, the truth is, today more than ever, the world is awash in cash. Over the past five years, a slew of forces - from the quantitative easing process to the emergence of a broadly-defined equities and real estate bull market and the sustained decline in bond yields - have created a colossal overhang of liquidity.
A reflection of that is the fact that the global private equity (PE) industry is currently sitting on its largest pile of cash ever - a staggering $1.2 trillion of so-called 'dry powder' to be exact.
As a result, a much larger and diverse set of global players have entered the realm of investing. This wave of new investors is set to radically shake up the game: they have the power to deploy capital around the world and are searching for innovative ways to generate returns. In short, they are looking beyond traditional segments and are ready to enter new arenas.
This, in turn, has helped shape a major trend - the strong need to diversify into other asset classes. Today, these investors are building a multi-asset investment portfolio. Here is a breakdown of how each asset class is evolving - both globally and regionally - in light of this new investment climate:
Private equity
The most mature of all private asset classes, the PE industry is vast, global and mature. Traditionally, it has also been the best-performing asset class for many institutional investors over the long term. Today, PE deal activity remains very strong. In parallel, diversification into other asset classes is a key ongoing trend in PE.
In recent years, international PE funds have used the Middle East for fund raising but the local investments of international players were limited due to the unavailability of larger investment opportunities. Now, however, the growing efforts of GCC governments to potentially privatise national companies might offer interesting opportunities. In addition, local infrastructure projects - set to generate $300 billion to $500 billion in the next three to five years - could open up more avenues to stimulate PE activities.
Hedge funds
Within the hedge fund universe, we have seen the rapid emergence of activism as a significant segment for players with money, ideas and the ability to go after even the largest companies in the world. Funds managed by activists jumped to $120 billion in 2014 after almost tripling over the previous five-year period. Activists, who buy sizeable stakes and agitate to increase value, targeted 369 companies in 2013, including the likes of Microsoft, Pepsico, Procter & Gamble, Dupont, Volvo, and Apple.
Sovereign wealth funds
These represent a diverse group in terms of size, maturity and objectives. Today, sovereign wealth funds (SWFs) boast over $7 trillion in assets under management (AUM); moreover, they are increasingly using private markets to increase their returns and diversify portfolios. Their asset allocations to PE, real estate and infrastructure are going up.
In the Middle East, SWFs have traditionally invested more abroad (in Europe or Americas). As a consequence of lower oil prices, these investments have been paused and/or reduced. At the same time, Middle East governments are increasing the pressure on local SWFs to invest in the local market, stimulate the economy and reduce the fiscal burden. Also, there is a significant push to manage reserves more efficiently and generate higher returns.
Pension and retirement funds
This industry is the largest segment in many ways with investments worth $15 trillion. Still, today, pension funds are facing critical challenges and funding gaps. This industry is ripe for transformation and will require a massive upgrade of skills and capabilities over the next 20 years.
In the GCC, the top pension funds have an estimated total AUM of $400 billion to $500 billion, which have been collecting underwhelming returns due to a plethora of factors. These include a combination of sub-optimal asset allocations with unproductive high cash reserves, limited exposure to high-return alternative investments, the fragmentation of mandates and very low internal skill levels. Most pension funds are already, or will soon be, facing funding gaps due to shifts in demographics and high benefit levels.
Infrastructure
When it comes to funding infrastructure projects, there is a trillion-dollar global shortage looming. Given the limited ability of governments around the world - including the Middle East - to fund these investments, private investors and private sector companies will play a pivotal role going forward and narrow their focus on airports, roads, ports, concessions, public-private partnerships (PPPs) and the like.
In the GCC, governments have once again turned their attention to PPPs and alternative sources of funding, which might offer international and regional investors the opportunity to participate in these projects. However, in order to fully unlock this potential, additional changes to regulation have to be made and a safe legal framework must be established.
So, what do today's new global investors have in common? Essentially, they manage large pools of money and are aggressively looking for returns. They are also eager to forge partnerships with one another, are constantly upgrading their capabilities and building their teams, and, more importantly, are increasingly global in their approach.
Tawfik Hammoud is senior partner and managing director at Boston Consulting Group, Canada. Massi Markus is partner and managing director at Boston Consulting Group Middle East. Views expressed are their own and do not reflect the newspaper's policy.