Alternative asset annual review: how markets performed in 2023

With 2024 just around the corner Alter Domus sector heads, Greg Myers, Anita Lyse, and Tim Toska reflect on the performance of private equity, private debt and real assets in what has been a challenging year for financial markets across the board.

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Private Equity in 2023: resilience in challenging circumstances

Private equity has experienced a challenging 2023.

Rising interest rates and the lack of consensus on future rate decisions have made it difficult to price risk, driving a wedge between buyer and seller pricing expectations, with negative consequences for deal flow and fundraising. Higher debt servicing costs and tightening availability of debt have not helped either. In the face of these headwinds, exit and buyout deal value suffered double digit declines over the first nine months of 2023.

A slowdown in deal activity and overall uncertainty has seen fundraising activity flatline after a long run of expansion. According to Pitchbook, private equity fundraising is on track to close the year only slightly ahead of figures for 2022. Macro-economic uncertainty has favored bigger managers, with funds that are $5 billion or larger representing almost half (47.2 percent) of capital raised during the first nine months of 2023, according to Pitchbook. This has left a smaller slice of the fundraising pie available to managers raising lower amounts.

All managers, regardless of size, however, have found fundraising challenging. LPs have ramped up due diligence and delayed decisions before making commitments. This has prolonged timelines from first close to final close.

The lack for distributions and cash flow concerns have seen LPs and GPs turn to secondaries markets to source liquidity, but even in this space pricing dislocation between sellers and buyers has impacted activity. According to Jefferies H1 2023 Global Secondary Market Review, GP-led secondaries deal slid 25 percent year-on-year over the first half of 2023, with LP-led transactions declining 24 percent. The share of LP deals of the overall market, however, has increased to 58 percent, up on the previous year. Volumes may be down, but LPs continue to turn to secondaries markets to rebalance portfolios and secure liquidity.

In addition to dealmaking, fundraising and liquidity pressures, managers have also had to navigate increasing regulatory complexity and change. In the summer of 2023, the US Securities and Exchange Commission (SEC) adopted the Private Funds Rules aimed to address practices that may impose significant risks and harms on investors and private funds. The new framework will change the way private equity firms engage with investors and may help to improve transparency and industry best practice, but will add to the regulatory, compliance and reporting workload for firms.

For all the challenges that have faced private equity in 2023 – both commercial and regulatory – the industry has demonstrated its ability to adapt to change and innovate.

As market conditions have become more challenging, quality has shone through, and it has been a focus for investors during due diligence to identify top performing managers that have shown the ability to navigate through market turmoil with sector/industry expertise and value-add initiatives.

Private equity firms have also made great strides forward to respect to unlocking investment from retail investors. Recognizing the huge potential retail investment presents (Bain & Co reports that some large managers anticipate between 30 percent and 50 percent of new capital raised to derive from the private wealth segment[1]), the industry has teamed up with various tech-enabled fundraising platforms to build pathways for individual investors to access private equity. Firms have also explored how feeder vehicles, open-ended funds, 40 Act Funds and European Long-Term Investment Fund (ELTIF 2.0) structures can help to democratize an asset class that has traditionally been limited institutional investors.

Firms have also invested significantly in technology or have looked to third party service providers to improve not only back-office efficiency, compliance and investor reporting, but also to support front office deal origination and value creation functions. Automation and AI are set to have a transformational impact on the industry over long term and allowing managers to differentiate their offerings to investors and drive value across their portfolios.

In the most difficult period for private equity in well over a decade, managers have continued to branch into new arenas and find value for investors, showcasing the resilience and creativity of the asset class in the face of broader macroeconomic challenges.

Private Debt in 2023: defying the odds

Private debt has emerged as one of the standout alternative assets strategies in 2023, delivering consistent returns for investors and winning market share from banks and syndicated loan markets.

Despite rising interest rates – which have seen syndicated loan markets grind to a halt and sparked a regional banking crisis in the US – private debt managers have continued to secure support from investors and source opportunities to deploy capital.

Forecasts from Pitchbook put private debt funds on track to raise more than $200 billion for the fourth consecutive year, with fundraising set to rise by around 10 percent year-on-year in 2023.

Fundraising resilience has reflected the asset class’s steady risk-adjusted returns (M&G figures show private debt outperforming public markets in 2022 and posting 8 percent returns) and strong positioning in a rising interest rate environment, with floating interest rates boosting returns from private debt long books.

Private debt managers have also emerged as the go-to option for deal financing, winning market share as other lenders have retrenched. Blackstone analysis showed private credit accounting for 86 percent of loans in the leveraged buyout market in year to November 2023.

Borrowers have valued the flexibility, speed of execution and reduced syndication risk that private debt players can offer, and with $425 billion of dry powder available to deploy, private debt has become established as a one of the biggest pools of liquidity available to companies and financial sponsors.

Private debt has also offered investors and borrowers optionality. Direct lending (where managers provide senior debt to finance M&A deals) accounts for the largest portion of the asset class, but private debt also encompasses mezzanine (subordinated debt that represents a claim on a company’s assets which is senior only to that of the common shares and usually unsecured) and distressed debt strategies. In markets characterized by tight liquidity, private debt has provided a variety of options to borrowers to fill out capital structures, and a mix of risk-return options for investors.

Of course, private debt has not been completely insulated from macro-economic headwinds. According to the Lincoln Senior Debt Index (LSDI), for example, which tracks portfolio companies backed by private equity firms and private lenders, direct lending loan defaults doubled in 2023 from levels observed in 2021.

Private debt is still a relatively nascent asset class that only really came to the fore in the aftermath of the 2008 banking crisis, and many managers will be steering portfolios through a downswing in the credit cycle for the first time. Markets will be watching closely to see how managers respond to portfolio distress.

Overall, however, private debt has delivered for investors and borrowers in 2023. According to Preqin figures, private debt assets under management (AUM) grew by more than 460 percent to $1.4 trillion between 2010 and 2022. After a strong year, this rapid expansion of the asset class may be only the beginning.

Real assets in 2023: a market in transition

Real assets fundraising and deal flow felt the effects of rising interest and higher financing costs in 2023, which forced investors and managers to recalibrate risk appetite and return expectations.

Soaring financing costs have not only directly and negatively impacted asset valuations, but have also put the brakes on transaction activity in most markets. Current Preqin numbers suggest that 2023 will record the lowest levels of transaction volumes for the past decade in both real estate and infrastructure.

The rising interest rates led to a delta between buyer and seller expectations, with buyers reluctant to pay high valuations for assets when financing costs are elevated, while sellers have held on to assets rather than selling at a discount into a falling market. Pockets of price correction had already emerged early for assets directly impacted by Brexit and COVID, and now more recently also as a result of inflation and increased interest rates, but the bid-ask spread remains high in several sectors and markets today.

Real assets fundraising, meanwhile, has also been on a downward trajectory in 2023. PERE figures showed a 38 percent decline in year-on-year real estate fundraising activity over the first nine months of the year, while CBRE analysis of Infralogic data showed 2023 infrastructure fundraising sliding to the lowest levels in more than a decade.

Against this tougher backdrop real assets managers have focused on reshaping their organizations and ensuring that operational models are fit for purpose. This has been particularly noticeable in real estate, where historically back and middle offices have tended to be larger than in other sectors.

Alter Domus has noted several examples of managers transitioning to a fully outsourced model. This has enabled managers to reduce technology, premises and staff costs, with parts of their back and middle office teams being lifted out by an administrator. Co-sourcing, a hybrid option, has also gained popularity.

But while it has undoubtedly been a challenging year for real assets managers, firms with scale have continued to secure strong support from investors. Compelling investment opportunities have also continued to emerge in real assets subsectors such as renewables and data centers.

Large managers who raised new funds in 2023 included Brookfield, which closed its largest on record at the end of 2023, securing $28 billion for its flagship infrastructure vehicle. Global Infrastructure Partners and Blackstone have also signposted their intent to raise new infrastructure funds of similar size.

The success of the Brookfield raise has shown that investors still trust established infrastructure managers with large investment platforms and strong track records to deliver inflation-indexed returns in an inflationary environment. Investors have pivoted decisively towards managers seen as having a “safe pair of hands” over newer managers that are still building their track records.

In addition to scale, expertise in renewable energy and energy transition has been another valuable differentiator for managers in infrastructure and real estate. Trillions of dollars of investment will be required to wean economies off hydrocarbons and reduce emissions, and governments around the world have put comprehensive funding and incentive packages in place to achieve net zero carbon emissions by 2050.

Managers with experience in building out wind and solar farms, electric vehicle charging points and wave and hydrogen power stations have been in high demand.

Environmental factors haven’t been limited exclusively to projects with a specific climate and emissions focus. Environmental, social, governance (ESG) has also impacted “vanilla” real estate and infrastructure assets, as sustainability becomes a greater priority for businesses and consumers.

Historically there has been little price drift between sustainable and unsustainable assets from a valuation perspective, but this has started to change as tenants demand more efficient buildings and investors construct portfolios to meet ESG targets. Although this trend is still emerging, and quantifying the precise contribution of ESG to valuation uplift remains tricky, there is now an industry consensus that the implementation of ESG best practice does go to value on exit.

Real assets may have been on the backfoot in 2023, but top tier managers with strong ESG and climate track records have continued to find opportunities and create value for investors in an otherwise challenging market.

Key contacts

Greg Myers

Greg Myers

United States

Global Sector Head, Debt Capital Markets

Anita Lyse

Anita Lyse


Global Sector Head, Real Assets

Tim Toska

Tim Toska

United States

Global Sector Head, Private Equity


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