Defining Alternative Investments
Alternative investments refer broadly to asset classes outside the traditional universe of listed equities, fixed income, and cash. They include:
These asset classes share several defining characteristics: illiquidity, valuation opacity, long-dated investment horizons, and often significant manager dispersion in performance outcomes.
Rationale for Alternative Allocations
While diversification remains a foundational rationale for alternative allocations, investors increasingly target alternatives for enhanced risk-adjusted returns and access to private-market alpha.
Studies such as the McKinsey Global Private Markets Review underscore how private equity has delivered net IRRs consistently above public equity indices, even post-fee. This outperformance often stems from value-creation levers unavailable to public markets:
However, these advantages come with liquidity constraints, fund-lock periods, and significant J-curve effects—factors demanding rigorous cash flow forecasting and liquidity stress testing.
The Illiquidity Premium
A core thesis for alternative investing is the capture of an illiquidity premium—the incremental return demanded by investors for surrendering liquidity. However, empirical data reveals a stark dispersion between top-quartile and bottom-quartile managers, with underperformance risk rising sharply in less experienced hands.
This reality fuels a growing institutional emphasis on manager selection and operational due diligence, with allocators deploying data analytics, scenario modeling, and increasingly AI-based diligence tools to enhance underwriting precision.
Private Equity and Venture Capital
Private equity (PE) remains the bedrock of alternatives, accounting for trillions in global AUM. Within PE, key strategies include:
Buyouts → Majority-control acquisitions of mature businesses.
Growth Equity → Minority investments in high-growth enterprises, a sector seeing robust activity despite recent valuation recalibrations.
Secondaries → A rapidly maturing market offering LPs and GPs liquidity solutions.
Venture capital (VC) sits at the opposite end of the risk spectrum, characterized by:
High failure rates balanced by outsized winners
Strong secular tailwinds in technology, life sciences, and deep tech
Increasing LP appetite for direct co-investments, seeking to reduce aggregate fee loads and enhance exposure to high-conviction opportunities
Private Debt
Since the Global Financial Crisis, regulatory tightening has curtailed bank lending, opening the door for private debt. Key strategies include:
Direct Lending: Senior secured loans to mid-market borrowers
Distressed Debt: Capitalizing on corporate restructuring and special situations
Mezzanine Financing: Hybrid capital structures offering both debt protection and equity-like upside
Morgan Stanley forecasts private debt AUM exceeding $2.6 trillion globally by 2029, driven by investor appetite for floating-rate exposure and yield premiums.
Private debt and private credit are often used interchangeably to describe lending and debt investments outside public markets, but there’s a subtle distinction: private debt refers more technically to the asset class itself, while private credit emphasizes the strategy and active role of managers in sourcing, structuring, and managing bespoke lending opportunities, making it increasingly favored in investor communications and marketing despite both terms covering largely the same universe of non-bank, privately negotiated debt instruments.
Infrastructure
Amid geopolitical risks, decarbonization mandates, and digital transformation, infrastructure investing has emerged as a strategic allocation focus. Managers like EQT or KKR are deploying capital into:
Renewable energy
Digital infrastructure
Transportation assets
These investments often deliver inflation-linked cash flows and low correlation to public markets, appealing to liability-driven investors seeking real asset-backed income.
ESG and Impact
A decade ago, ESG and impact considerations occupied the periphery of private market investing. Today, they have become integral to capital allocation strategies. Assets managed under environmental, social, and governance (ESG) mandates are projected to exceed $53 trillion by 2025, accounting for over one-third of the anticipated $140.5 trillion in global assets under management—a 40% increase from $37.8 trillion in 2021 and more than double the levels observed in 2016.
Empirical research consistently demonstrates that sustainability-focused strategies can deliver superior investment performance, often outperforming traditional approaches across various market conditions and exhibiting greater resilience during periods of volatility.
Increasingly, fund managers are adopting ESG frameworks not merely as tools for risk mitigation but as powerful levers for value creation, capable of enhancing portfolio company performance and generating significant exit premiums. Studies indicate that businesses prioritizing sustainable practices are, on average, more attractive to both investors and strategic acquirers.
At Zero One Hundred Conferences, we closely follow the varied strategies LPs and GPs employ to integrate ESG and impact considerations. Through our podcast, Impact Talks, and our events, we provide a platform for meaningful exchanges of ideas, enabling investors to share insights from their unique positions within the industry.
