Demand for alternative assets continues to rise, but not without risk, according to Moody’s Investors Service.

In 2021, fundraising for alternative assets, including private equity, real estate, infrastructure, private debt and natural resources, exceeded $ 1.1 trillion, and total assets under management in alternatives topped $ 9 trillion, according to Moody’s 2022 asset management outlook released on Tuesday. Heading into 2022, Moody’s analysts expect alternative asset fundraising to remain strong as institutional investor demand for long-term returns with low-yielding liquid assets continues.

Unsurprisingly, private equity remains one of the most popular asset classes. In 2021, the asset class raised $ 737 billion and reached $ 5.8 trillion in assets under management after posting an annual return of 45.2% through March 2021. In 2022, analysts at Moody’s predict that private equity will continue to generate strong returns.

“There is this continuing wave of available capital to put to work,” said Neil Epstein, vice president and senior credit manager at Moody’s. Institutional investor.

Epstein said institutional investors were drawn to higher yielding asset classes like private equity due to low interest rates and monetary intervention, which made the benchmark yield curve consistently low in recent years. The lower yields also prompted greater use of leverage to increase portfolio returns, he said.

“As interest rates have been lower, institutional investors facing these performance barriers have looked to other asset classes for more yield,” Epstein said.

For now, Moody’s 2022’s overall outlook for the asset management industry is stable, but booming alternative asset classes carry some risks. In the report, Moody’s highlights three potential hurdles that alternative investors may face in the near future. First, Moody’s has expressed concerns about the increased systemic credit risk due to the increased allocation to these leveraged assets. Private equity funds typically do leveraged buyouts, and as the asset class grows, so does the amount of borrowing, Epstein said.

“There’s been a lot of borrowing and debt buyouts tend to use pretty aggressive debt structures,” Epstein said. “Businesses tend to carry a considerable amount of debt. Especially since this activity has passed into the private domain, there is less visibility and transparency and perhaps more aggressive terms.

As activity has grown, Epstein said Moody’s has seen “lower-rated” companies borrow more capital. In the report, Moody’s asked whether weaker credit could withstand high rates or a slowdown. Because rates are lower, weaker creditors have been tempted to buy more, Epstein said, but if rates rise, they might not be able to support the debt.

Finally, the illiquidity that accompanies investments in alternative asset classes may put future pressure on portfolios, according to the report. With private investments, investors cannot get out of their investments as easily as they can sell government stocks and bonds.

“Will this create stress in the sector? Said Epstein. “These are only open questions, but these are things to be concerned about. ”