Alternative Investment Outlook: 2023 Takeaways, and What We’re Watching in 2024

By Hank Boughner, Dynamo Software

 

2023 was another wild ride for the global investment community. On the one hand, turbulence included continued economic headwinds, geopolitical turmoil, and new regulation on many fronts. At the same time, certain equity markets are at all-time highs. Moreover, investors found a bright spot in alternatives. An abundance of dry powder is refueling deal flow in resilient sectors and a new landscape of investments opportunities emerged for innovative and disruptive technologies spurred by artificial intelligence (“AI”) and other new technologies. 

Throughout the year’s peaks and valleys, Dynamo surveyed a global audience of alternative investors quarterly to maintain the pulse of their priorities, challenges, attitudes and plans. Based on our research, and our frontline experience working with more than 1,000 investor clients around the globe, there were a few key takeaways that we believe set the stage for another dynamic year in 2024. 

Record Levels of Dry Powder Set a Highly Competitive Stage for 2024

Investors’ dry powder reached record levels in 2023. With more capital to deploy than ever, an increasingly competitive deal market is heating up. Certain sectors, like artificial intelligence, are driving a new wave of investment opportunity, and the LP investors Dynamo surveyed said generative AI was the top area of technology they want their fund managers to invest.

But, as the new landscape explodes, investors won’t invest in AI companies just for the sake of the technology. The application of the technology is key, and it can impact a range of industries, particularly those that have highly-repetitive, data centric processes.  So there is an opportunity for early stage AI investment, along with industries that will be impacted positively by the automation AI can enable.  These companies seeking capital must demonstrate their ability to address real-world problems and prove tangible outcomes. In order to succeed in the highly competitive environment, private equity and venture capital firms must have robust deal management capabilities that allow them to source and evaluate proprietary deals, accurately identifying and calculating growth opportunities and risk. 

Adept Data Management Moves from Want to Need Amid New RegulationEvery audience Dynamo surveyed – LPs, GPs, and emerging managers – had data management on their top list of priorities in 2023. This is no mystery, as new types and sources of data become available daily. Complicating the picture for alternative investors deal are the massive volumes of unstructured data overwhelming their teams and driving inefficiencies across processes. 

New SEC regulations for private funds introduced in 2023 will make detailed data management an essential priority. To remain compliant as the news rules take effect, alternative investors must be able to efficiently and accurately track and report on more detailed and granular data.

Investors Growing More Stringent About Syncing ESG Claims with Performance 

Collective awareness is growing among alternative investors that ESG factors are increasingly important. In Dynamo’s ESG/DEI survey of GP and LP investors, the majority in both groups said it had some degree of importance in their investment decisions.

At the same time, investors were mixed about how the performance of the ESG investments, overwhelmingly citing the lack of industry-wide standards as their top ESG-investing challenge. This has further fed worries about greenwashing, with a significant percentage (more than 60%) of those Dynamo surveyed expressing concerns about the potential for the deceptive practice in their portfolios. 

ESG investors are becoming more sophisticated and have access to more data than ever before. They aren’t just looking for companies that are doing good, but generating alpha. Robust and objective ESG ratings and scoring systems can sync claims with performance and help investors demonstrate the real impact of ESG investments on both their business and society.

Middle East Market Attracting Investor Attention

The visible transformation taking place in the Middle East has captured the attention of domestic and international private investors alike. Since Dynamo expanded its presence to the UAE in 2022, we have witnessed the flourishing entrepreneurial spirit and rapidly growing economies that are driving growth and innovation in the region. This is a welcome expansion from the historic presence of ME investors, who historically have participated actively as LP/allocators across a range of alternative investments sectors in North America, Europe and APAC.  

Much of the world has struggled to rein in inflation, with many major markets still teetering on the edge of recession. The Middle East has remained a bright spot, projecting stability, innovation, and opportunity to capital markets.  Led by the UAE and Saudi Arabia, the Arabian Gulf, in particular, has attracted a considerable amount of foreign investment, while maintain their presence as active LP investors. 

Given geographic proximity, there is also a strong corridor that has developed between the ME and India, one of the largest growth markets globally. In fact, at the September 2023 G20 summit, there was a breakthrough in post-Partition India’s quest to establish deeper trade relations with the regions to the north-west. As a result, it is expected to help the UAE double its non-oil trade by 2031, while also extending benefits to other regions that will help facilitate increased trade with Europe and India. This will further help increase capital pools, which will also be attractive to alternative investors.

Alternative Investors Must be Nimble in 2024

Again in 2024, investors will have to navigate the waters of uncertainty. Those who seek to outperform will need agility, efficiency, and strategic insight to leverage alternative investments potential to tap into high-growth sectors and accelerate value creation.