Key Points

  • Investors should look beyond just equities and bonds for attractive long-term growth and income.
  • Listed alternatives are trading on steep discounts to underlying asset values. 
  • This creates significant potential value for multi-asset investors based on our long-term outlook.
For most of the past decade, markets have been in a regime of falling interest rates and low inflation. This regime favoured the traditional 60/40 (equity/bond) portfolio. However, this changed in 2022. Central banks raised interest rates rapidly to counter high inflation. As a result, fears over slowing growth led to equities and bonds falling in tandem, despite typical expectations of bonds helping to counter equity market volatility.

The positive correlation between bond and equity prices has periodically extended into 2023 and there are multiple reasons as to why this could continue as we head into 2024.

Understandably, investors have been asking whether there are better ways to construct a balanced portfolio. In doing so, they are increasingly looking for more diversified sources of growth and income, that could also prove resilient during periods of stress.

One option may be ‘alternative’ asset classes. That said, the biggest challenge has been that historically, these were not accessible to individual investors, came with long lock-up periods, high costs and significant minimum-investment requirements.

However, this has changed over time.

Democratising alternatives

Demand for alternative assets from a broader range of investors has led to the creation of new vehicles, such as Long-Term Asset Funds (LTAFs) in the UK. These offer investors access to a combination of private (non-listed) and public assets and are often categorised as ‘semi liquid’, as they only offer investors liquidity during specified periods.

While this might be suitable for some, there is always a risk that liquidity may not be readily available during more challenging market conditions.

Alternatively, investors can access truly liquid alternatives via markets such as the investment trust market – these are closed-ended vehicles which are traded daily on major stock exchanges.

Unlike LTAFs, they are not new, having been around since the 1800s. But over the past two decades, they have evolved to offer exposure to a broad range of alternative asset classes including private equity, specialist credit, infrastructure, music royalties and litigation finance.

Listed versus unlisted alternatives – performance

In recent years, however, the experience of investors in listed alternative asset classes has diverged from that of investors who invested directly in private markets.

Private market investors, accessing alternatives through less liquid structures, have generally experienced remarkably stable valuations, despite broader market volatility.

In contrast, the share prices of many listed alternatives have experienced greater volatility despite reasonably stable underlying asset values.

The question is, therefore, whether today’s discounts are creating attractive opportunities for long-term investors. Let’s look at some of these asset classes:

Private equity

Private equity valuations have yet to see significant valuation markdowns. This has been the case despite fewer transactions, higher borrowing costs for underlying companies, weaker equity markets and a more challenging economic outlook.

Contrast this with listed private equity investment companies for which share prices have seen sharp declines. With the valuations of their underlying assets relatively stable, discounts to asset values are now extreme (see Chart 1).

Chart 1: Listed private equity (ex-3i) 10-year premium/discount history

Source:  Numis, November 2023


Reported infrastructure valuations have been equally resilient. While ‘core’ infrastructure assets with limited inflation linkage have felt some impact from rising interest rates, those assets with positive inflation linkage, or are underpinned by structural megatrends, such as digitalisation, have performed well.

It is a similar story within renewable infrastructure where there is secular long-term demand from the global commitment to decarbonise energy production.

That said, despite resilient performance during the initial impact of inflation and interest-rate shock of 2022, many listed infrastructure companies now trade at historically unprecedented discounts (see Chart 2). 

Chart 2: Listed infrastructure 10-year premium/discount history

Source: Numis, November 2023

Real estate

The performance of real estate assets in public and private markets has been more consistent.

While listed real estate investment trust (REIT) prices fell faster and further than private real estate values, the private market has been working hard to catch up ever since.

The fall in real estate asset prices reflects ‘yield revaluation’ – as investors review relative returns against other asset classes, rising debt costs, falling transaction volumes and negative structural trends for sectors such as offices, amid a global shift towards hybrid work practices.

Despite this, REITs still trade on meaningful discounts to asset values – which suggests investors should take a closer look to see why (see Chart 3).

Chart 3: Global real estate premium/discount to net asset

Source: UBS, abrdn, October 2023

What’s the outlook for listed alternatives?

Investors should question the valuations of private market assets and ask whether the discounts associated with listed alternatives are real, or whether they reflect a likely future impairment to underlying asset values.

The stability of private equity valuations, in contrast to the large swings in equity and bond markets, has been met with scepticism by public market investors.

Similarly, rising bond yields have led to questions regarding the impact on the valuations of infrastructure projects, despite tailwinds such as inflation-linked revenues.

In the case of real estate, both public and private markets have moved in the same direction, although there are still risks to valuations in our view.

In periods such as the one we’re in, when there is a heightened focus on valuations, we would expect discounts in public markets to emerge, with investors requiring a margin of error on asset valuation assumptions.

However, in many areas of the market today, what we see is listed alternative share prices that have dislocated from private market valuations and are factoring in a more pessimistic long-term outcome.

Importantly, we have seen a number of recent private market transactions within the listed alternatives universe which help to validate underlying asset values and highlight the potential for compelling long-term opportunities (see Chart 4).

This is most apparent in the listed infrastructure space, where we see significant long-term value. There are also more selective opportunities in listed private equity and listed real estate.

Chart 4: Selected listed alternatives transactions (2023)

Source: abrdn, December 2023

Final thoughts

As we enter 2024, we see significant opportunities in listed alternative driven by:

1. Differentiated underlying risks and returns from traditional asset classes.

2. Attractive long-term returns opportunities enhanced by current share price discounts.

3. The realisation of shareholder value through asset sales and other corporate actions.

To exploit these opportunities, we believe it is critical that investors look through near-term noise, focus on the underlying fundamentals of investments and identify quality opportunities with robust, or improving, governance structures.