Alternative Investments

Are you alternative? The AMs leading the real assets charge

The so-called democratization of private markets has opened up new avenues for traditional asset managers. But who is getting it right and who is leading the charge?

The world has grown up in these two silos. There has been a world of alternatives and the world of long-only. We think those two worlds are coming together. The winners will be those that can do both well.’ David Hunt, CEO, PGIM (May, 2019)

Real assets and alternatives – covering everything from private debt to aviation financing and beyond – have been bubbling under the surface for traditional asset management for an extended period.

Take David Hunt’s quote above, which was a full nine months before the Covid-19 pandemic supercharged change across the industry; it shows how asset managers view a move into uncharted territory as a way to grow reputations and assets.

Recent developments have included Schroders creating a dedicated arm, Schroders Capital, which has responsibility for $66bn in assets under management (AUM) and the precise remit of becoming a heavy hitter in this area.

With the private markets industry expected to grow to $21tn by 2025 – from $14tn in 2020 – according to Schroders data, there is a huge opportunity for those who can get ahead of the game and deliver on the challenge of meeting specific product and liquidity demands.

‘Investing in private equity has historically been out of reach for the vast majority of investors apart from big institutions, but this is changing quickly, and we are well placed to support investors to take full advantage of this shift,’ Rainer Ender, head of private equity at Schroders, told Citywire in June.

The push for alternatives in action

Others have sought to capitalize on investor interest in different ways. US fund house Artisan Partners, a traditional asset manager that operates with a quasi-multi-boutique structure, outlined plans to bring private assets more prominently into the mix as part of its H2 2021 business update.

This would involve capitalizing on the trend of fewer companies going public and more staying private. ‘It’s very obvious in the US with a number of securities going from over 8,000 to under 4,000 of publicly traded,’ said Artisan Partners’ CEO Eric Colson.

‘You’ve seen the growth of the private company universe as companies have stayed private longer. The late-stage private companies have a lot of characteristics that you see in the early-stage public companies. That blending is occurring. We always take it as an investment-first approach. The support of the model around private is very important. It needs to be acknowledged. It is different to public markets.’

Dr Christian Seilheimer, head of product management alternative investments and real estate at Union Investment, is spearheading the German fund house’s aggressive push in this area. He is aware it is a tough task, especially as competition intensifies, but the company has put alternatives expansion at the heart of its corporate strategy for 2021.

‘Many traditional asset managers that have expanded into alternative investments have maintained their previous approach and only selectively offer wide-range services for alternative investments. We are positioning ourselves as a solution provider,’ he said.

‘In addition to the pure product, we offer digital, customer-oriented reporting, excellent customer service and the consideration of ESG criteria in the investment process. In this way we can successfully differentiate ourselves from our competitors.’

However, using the speculator’s mantra, it takes money to make money. Union Investment is investing in resources as well as seeking built-up core competencies. It has signed a deal with private debt manager aam2cred Debt Investment, which focuses on mezzanine and whole-loan financing, and launched a product aimed at institutional investors.

This is all with the intention of increasing its alternatives-specific assets from about 10.5% of its €472bn in AUM to a much greater level in the coming years. Seilheimer singled out structured credit as an alternative idea that has untapped potential and is something the German group thinks it could do organically.

Union Investment is not alone in having ambitions here. Europe’s largest asset manager, Amundi, has accelerated growth in this area and now has €95bn in real assets and alternatives. But given its €1.79tn in assets, this is a relatively small piece of the pie.

However, the French fund house is putting a lot of faith in this area of the market and cited Covid-19 as a driving factor for further asset growth. ‘Real assets appear to be the winning bet for the post-Covid-19 world, as they have the potential to combine protection against inflation with the prospect of higher returns than traditional liquid assets,’ the company wrote in a white paper in September.

‘According to Amundi analysis, over the next 10 years real and alternative assets could offer an extra return over traditional asset classes worth 200-500bps, depending on the asset class. This extra income opportunity could approach the higher bound of this range through an active asset-picking policy.’

A bigger slice of the pie

Another German fund house, DWS, is looking to move beyond the current level of 12% allocation to alternatives out of its €895bn AUM, which equates to about €107bn in the likes of private real estate, private infrastructure, liquid real assets, sustainable investments, private equity and hedge funds.

Similarly, Swiss asset management giant Credit Suisse has steadily built up capabilities in this area. The supply chain finance funds fiasco aside, the Zurich-headquartered group has around 25% of its CHF471bn (€433bn) in alternative assets, such as credit, real estate, commodities, private equity and hedge funds.

However, even these levels are still somewhat behind JPM Asset Management. According to figures sent to Selector, the group now has $168bn in dedicated alternative projects, with a specialist unit comprising 600 investment professionals.

Seeking a competitive edge, JPM has moved into interesting areas, including timberland. In June it purchased forest management and timberland Investing company Campbell Global.

Speaking at the time, George Gatch, CEO of JPM, said: ‘This acquisition expands our alternatives offering and demonstrates our desire to integrate sustainability into our business in a way that is meaningful.

‘Investing in timberland on behalf of institutional and high-net-worth individuals will allow us to apply our expertise in managing real assets to forests, which are a natural solution to many of the world’s climate, biodiversity and social challenges.’

ESG crossover

The crossover with ESG has become increasingly apparent, as companies aim to hit the sweet spot between real assets and impact investing, which is exemplified by the likes of Nordea Asset Management working closely with Trill Impact.

The companies announced the successful raising of €900m in commitments at the start of September, and four transactions have been completed since the fund first came to market in 2019.

Also in 2019, Swiss private bank Syz Group created a dedicated unit, and Selector also exclusively revealed that French manager Carmignac has been moving into private equity throughout 2021, having seeded specialist mid-market company Cap10 Partners.

Fidelity International has also built capabilities in this area over the past two years. Even those who do not pack the biggest punch in terms of assets have laid down considerable foundations in the real assets space.

Cohen & Steers, which sits on the border between traditional asset management and a specialism in real assets, surpassed $100bn in AUM in August, marking its 35-year journey refining its areas of knowledge. CEO Robert Steers has some words of warning for those looking to make inroads into his fund house’s area of power.

‘If I was giving advice to anyone first starting out in this industry, it would be this: don’t try to go head-to-head with people with more experience and more size.

‘The challenge is to find your niche, but that niche has to be both deep and sustainable to justify going into that area. ‘One of our long-held beliefs is there is no point competing in parts of the market that are already commoditised. You want to provide something that is different and not competing with the likes of Blackstone, which have supreme size and scale.

‘We need to be adding to the conversation and innovating in a way that is useful to our clients and not beyond what we are capable of. In order to be credible and sustainable, we focused on what we knew – which was the real estate market – and we have grown our expertise there.’

Where, then, can companies find an edge but remain within the grasp of investors? Union Investment’s Seilheimer named wine, art and vintage cars as being on the cusp of the alternative bracket but not necessarily worthy of inclusion for its institutional client base. He also said cryptocurrency has emerged as a discussion point.

Who will be brave enough to bring crypto to the retail masses in the guise of an alternative offering? Steers questions such short-term thinking. ‘Here, as much as in traditional asset management, you really need to be thinking about things over a three- to five-year basis, he said.

‘Three or four years ago we were thinking about direct real estate and extrapolating out how a portfolio could access that. We didn’t foresee the pandemic, but at a time when traditional areas of the market either have stretched valuations or no income, you have to ask, where do we go from here? That is what you have to keep one eye on, but also whether you know what you’re doing.’

So, with the existing players looking to solidify their hold on the specialist areas, and more traditional asset managers keen to break new ground, it would appear that there is going to be a dogfight for investors’ assets over the coming year.

So, who stands to win in such a scenario? Rewinding to PGIM’s Hunt and his 2019 comments, the biggest fear remains liquidity and the idea that allowing retail investors – who border on a day-trader mentality – into an arena famed for its lock-up periods for assets, could spell disaster.

‘It’s about education,’ said Steers. ‘You have to take time, educate and not become a hot product shop. Selectivity will be key in making sure this works for everyone.’

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