Alternative assets: Why governance is key to strategic advantage

The global market for alternative assets is projected to exceed $17 trillion by 2025, according to data from Preqin. This rapid growth is increasingly driven by investments in renewable energy and climate assets, as highlighted by recent discussions during Climate Week.

Global leaders, including UN Secretary-General António Guterres, emphasized the urgency of accelerating the shift towards cleaner energy solutions and mobilizing investment for renewable energy. Guterres’s call to action stressed that addressing the "triple planetary crisis" of climate change, pollution, and biodiversity loss requires not just more funding but also better governance to ensure the effectiveness of these investments.

Despite such ambitious targets, the renewable energy transition, like many alternative assets, is fraught with governance risks. Corruption, regulatory breaches, and ethical lapses pose existential threats that can quickly erode investor value. Despite the growing complexity and global reach of these investments, many asset managers continue to be tested on the true extent of the risks in their portfolios. They fail to fully grasp the strategic importance of robust compliance frameworks that recognize environmental, sustainability, and governance equally.

The consequences of neglecting these risks by investors have been profound, shaking some leading firms to their core. Och-Ziff Capital Management (now Sculptor), once a dominant force in the hedge fund industry, became embroiled in a scandal involving extensive bribery across several African nations to secure lucrative mining deals. The firm faced over $400 million in fines, but the financial penalties were only part of the fallout. The scandal triggered significant investor withdrawals, a sharp decline in the firm’s stock price, and long-lasting reputational damage that ultimately led to a company rebrand.

Similarly, alternative asset firms, particularly those whose funds take controlling, near controlling, or significant debt positions in portfolio companies, should be vigilant about subsidiary risks that can arise from the day-to-day operations of these businesses. The ongoing situation with Evergrande, the Chinese property giant, illustrates the complexities and risks in the real estate sector. With over $300 billion in liabilities, Evergrande’s collapse has exposed governance failures, mismanagement, and unsustainable debt practices, triggering a ripple effect across global markets. The firm’s downfall highlights the risks of investing in large-scale alternative assets that lack proper financial oversight and governance, leaving creditors, investors, and other stakeholders facing severe financial losses. The real estate losses exacerbated a domino effect impacting its non-core strategies, including renewable energy investments.

These cases underscore that corruption and compliance failures are not confined to any single region or sector—they are a global phenomenon, distorting markets from New York to to Shanghai. For asset managers, the message is clear: robust compliance frameworks that truly understand the importance of governance are not merely a regulatory obligation but a strategic necessity.

Leadership in this area remains the exception rather than the rule. Alternative assets, including private equity, hedge funds, real estate, commodities, and digital assets, have become increasingly attractive to investors for their potential to deliver higher returns and diversify portfolios. For example, critical minerals—essential to produce electric vehicles and renewable energy technologies—have seen a surge in investment. However, the complexity and diversity of their regulatory environments pose unique compliance challenges. The intricate structures and multi-layered investments inherent in alternative assets often obscure early warning signs of potential regulatory breaches, leaving asset managers, investment funds and portfolio companies vulnerable to unforeseen risks.

Despite increasing scrutiny from regulators, many asset managers remain disturbingly unaware of the full spectrum of corruption risks lurking within their portfolios. A recent report on renewable energy underscores these concerns, highlighting how corruption risks—such as opaque licensing processes, fraudulent benefit funds, and the misuse of subsidies—are emerging threats to the effectiveness of climate investments. The opacity of these investments can mask significant dangers, often only coming to light when it’s too late to prevent substantial financial or reputational damage. The disconnect between perceived and actual risk represents a missed opportunity for asset managers to leverage compliance as a strategic tool for value creation.

In this complex and opaque environment, effective collaboration between compliance teams and business units is not just a regulatory requirement—it is a strategic imperative. Compliance professionals are able to provide guidance to investment teams, emphasizing the importance of strategies that not only maximize profitability but also ensure superior returns for investors. In turn, investment teams should integrate compliance strategies and technological innovations, recognizing that effective risk mitigation throughout the investment lifecycle is essential for safeguarding both their own interests and those of their investors. This synergistic partnership enhances overall investment performance and contributes to sustainable success.

Within private equity, considering compliance in the early stages is still not the norm, as compliance is often treated as an afterthought rather than a core business value. Investment managers will often only consider financial returns on a potential deal without considering the inherent risks of doing business in high-risk jurisdictions. While such gaps in compliance leadership persist, there are notable examples of firms that have taken proactive steps to integrate anti-corruption compliance into their core strategies.

For instance, Norges Bank Investment Management (NBIM) in Partnership with the Basel Institute of Governance has set clear expectations for companies, particularly in the healthcare sector, on anti-corruption measures. By demanding transparency and standardized metrics, NBIM not only protects its investments but also sets industry benchmarks that others would do well to follow.

Another significant initiative is the Blue Dot Network (BDN), a multilateral effort led by the US, Japan, Australia, Spain, Switzerland, Türkiye and the UK. The Blue Dot Network aims to certify infrastructure projects that meet high standards of transparency, sustainability, and governance. This certification provides a powerful tool for investors, enabling them to differentiate between projects based on governance standards and prioritize investments that align with global best practices. The Blue Dot Network exemplifies how a focus on good governance can mitigate corruption risks while also attracting more investment and facilitating better financial outcomes.

Finally, emerging technologies such as real-time governance tools and even artificial intelligence (AI) are beginning to transform compliance practices. These technologies offer innovative solutions for mitigating risks associated with an alternative asset’s investment lifecycle including due diligence, source of funds verification, compliance programme implementation, detecting balance sheet anomalies and providing a higher level of assurance in managing alternative assets. Asset managers who are quick to adopt these advancements will find themselves at the forefront of the industry, better positioned to navigate the increasingly complex regulatory landscape.

As alternative assets continue to grow in importance and operate in ever more exposed frontiers, so too does the need for strong compliance partnerships that meet the elusive "G" for governance. These partnerships are not just about avoiding penalties—they are about steering investments through the complexities of modern markets with integrity and foresight.

Whether in renewable energy, infrastructure, or critical minerals, ensuring that governance frameworks are as robust as the assets themselves will be crucial for unlocking long-term value and safeguarding future growth. In this field, it’s not just about playing by the rules—it’s about mastering them to unlock lasting value.