Global Asset Allocators Shifting into a Higher Gear on Alternatives

By Umesh Sangaralingam, Senior Sales Director for Institutional & LPs in the EMEA region, Dynamo Software

 

Fourth annual study of Limited Partners shows many eyeing a new approach to private market partnerships

The world’s limited partners (LPs) — from pension funds and institutional investors to family offices — continue to trust fund managers to take the wheel on alternative investments (ALTS), such as private equity, venture capital, hedge funds and real estate. Yet, fresh research out this month indicates they’re no longer content to simply watch as the scenery rolls by. Increasingly, LPs are seeking opportunities to co-navigate the twists and turns of today’s private markets. 

The findings come from a survey of more than 90 global LPs, now in its fourth year. They can be accessed in the Dynamo Frontline Insight Report: Analyzing Trends, Identifying Challenges and Harnessing Insights from Leading LPs & Asset Allocators.

 

Fund manager reliance falls while co-investments rise
Among the signals that more LPs are considering a more hands-on approach to their ALTS strategy is this compelling finding: LP reliance on fund managers fell to 70%, continuing a decline from 86% in 2023.

This is not to say the LP appetite for ALTS is waning—quite the opposite, in fact. Interest in ALTS has never been stronger, with 54% of LPs saying they plan to boost their allocations in 2025, continuing a four-year streak of planned increases. 

Taken together, these pieces of data show LPs leaning in on alternatives, but with a sharper sense of agency. No longer satisfied with being purely passive capital providers, today’s LPs are looking want to shape outcomes, not merely fund them.

One of the strategies LPs are considering as they look to take a more active role is that of co-investments. The percentage of LPs choosing to invest directly alongside their fund managers, rather than rely on pooled funds alone, rose to 56% — a full five points higher than last year. In addition to granting LPs greater control over their investment strategies, co-investments often come with cost savings that can enhance returns. This is likely very attractive to today’s asset allocators, many of which are experiencing heightened pressure for alpha. 

What LPs’ desire for greater control means for GPs
The Dynamo research points to several clues for solution-minded General Partners (GPs), the fund managers charged with steering investment funds. To remain at the center of value creation, GPs are likely to benefit from doubling down on strategies that foster more transparency and trust in their investor relationships. Good communication will underpin any such approach, and digital communication platforms that speed up and smooth out GP-LP communications is one way to achieve stronger communication. These platforms serve as a central hub for GP-LP interactions, accelerating data flow and analysis, lending a greater sense of transparency to the relationship.

LPs are looking to streamline the most time-intensive research tasks, such as fund manager due diligence. This particular task seems to be causing its fair share of headaches for LPs, as it moved up two whole spots this year on the list of most pressing investment-process challenges. This also underscores LPs’ desire to ensure greater alignment with GPs and their investment strategies. GPs will be well-served by preparing well-organized digital packages to satisfy intensifying due diligence requests.

Greater scrutiny applied to tech-focused funds
When it comes to tech funds — one of the buzziest areas of investor interest — LPs are displaying more discernment. For that reason, GPs may want to take a more measured approach to structuring their tech-focused funds. LPs appear to be casting a more critical eye on external technology investments, naming several as “overhyped,” including the metaverse/virtual reality (56%), cryptocurrencies/blockchain (45%) and AI/machine learning (35%).

From an allocation perspective, GPs may also want to consider LPs’ potentially mounting preference for domestic markets by expanding near-shore co-investment opportunities. This possibly emerging trend has been noted by some private market analysts and may be further supported by Dynamo’s recent research. In the Dynamo survey, North America’s share of LP focus dropped to 48% from a peak of 78% in 2024. Rather than seeing this as a strong signal of waning interest in North America, it may indicate a stronger home-country bias. More European and APAC investors participated in this year’s survey, and correspondingly, interest in Europe and Asia each rose to 27% and 23%, respectively. 

Global economic uncertainty, which LPs cited as their top challenge this year, in combination with U.S. led geopolitical shifts, may be pushing asset allocators to rethink the balance between global diversification and reshoring their capital allocations.

Rethinking the LP-GP relationship
LPs are embracing opportunities in private investing, albeit with higher expectations for alignment, transparency and shared decision-making. There are clear signs that LPs are looking for partners, not just portfolio managers. 

GPs that view and treat LPs as much more than sources of capital are likely to gain strategic allies that lend even greater decision-making power and better outcomes for all stakeholders. The road ahead for alternatives will no doubt be full of twists and turns, but those willing to share the wheel are likely to find the journey leads to stronger, longer-lasting partnerships.

For more data and analysis related to trends among private market players, be sure to watch Dynamo Software’s resource library. Published quarterly,  contain primary research contextualized by Dynamo subject matter experts in formal Frontline research reports. To date, Dynamo’s research team has focused on delivering noteworthy insights related to the attitudes, predictions and strategic plans of LPs, GPs, hedge funds, emerging managers and fund accountants.