Alternative assets (or private assets) are probably one of the fastest growing sectors in the world today. The volume of assets under management was forecast by Preqin, a provider of data and insights in private markets, at approximately $14 trillion in 2021, and it expects an increase of 64% to over $23 trillion by 2027.
In terms of asset allocation, the experts explain, global institutional entities allocate tens of percent to investment in this area, but do alternative assets really provide a return in excess over the open market? Investment giant Apollo Global Management and Israeli insurance company The Phoenix Holdings (TASE: PHOE) are sure the answer is yes, explaining this is not the only advantage.
"The investment opportunities in the private segment are enormous," states Hagai Schreiber , chief investment officer of Phoenix Holdings, speaking at the Globes Alternative Investment Conference, held in partnership with Phoenix and Apollo Global, one of the world's leading and largest investment firms. According to Schreiber, his company is serious about the field, and "manages funds for a period of 20-25 years. Investing in this sector involves a very long process of due diligence, legal matters, tax, etc. We only invest when there is an opportunity that provides us with a premium for the complexity or lack of liquidity, or when it comes to areas with no alternative to stocks or bonds."
The exposure of Israeli institutions to the alternative market is increasing, but still hasn’t caught up with the global trend.
Schreiber also adds that Israeli institutions have aligned with the general trajectory from 20%-15% exposure to alternative assets eight years ago to almost 40% exposure today, and notes this is also the global trend. "If you look at the asset allocations of universities like Harvard and Yale, you will see about 50% of their portfolios are allocated to private investments, some of them even up to 60%-70%. Of course we need more liquidity, because in Israel it is easy to switch between pension funds. Exposure is still a bit lower in investment funds and pension funds, because they are growing fast, but when growth slows down, it will stabilize at 40%-30%."
"A huge trend "
Eric Lhomond, partner at Apollo Asset Management Europe, adds that moving funds to the private market is "a huge trend that still has lots of room to develop." According to Lhomond, "At more sophisticated institutional investors, such as Harvard University, 40% of allocations are to private assets. Large pension funds in Europe and the US also allocate a significant portion of their assets to private investments. Insurance companies are also transferring funds in this direction, and this is true both for our company and for competitors such as Blackstone and KKR."
The reason for this is quite simple, Lhomond explains. "The private market is much larger than the public market, simply because there are many more small companies than large companies. In other words, the private market offers you greater possibilities."
Does the private market achieve higher returns than the public market?
Lhomond points out that returns are better in private investments. "When it is done well, and in most cases the issuances in the private market are done well, with a higher quality underwriting process than in the public market. In the private market, an independent research and underwriting process is necessary. Over time, you can see a premium gap, an excess return, of about 200 basis points (2%) which I attribute to the illiquidity or complexity premium associated with investing in this area."
Says Schreiber, "The private sector provides a 2% premium for private credit (debt). When it comes to private equity investments, the premium is even higher - between 3% and 5% - an excess return due to illiquidity, and this is a premium that our pension savers are certainly entitled to."
The lack of liquidity issue
Still, isn’t the lack of liquidity a disadvantage?
Schreiber: "Of course illiquidity is a disadvantage, but as long as we are well compensated for it, it is not something that needs to be stopped. We must remember that we have funds under management for pension funds for a period of 20-25 years, and these funds are mostly locked anyway."
Lhomond: "It's balance or trade-off. You get paid for the lack of liquidity. So, if you need the money tomorrow, it's not worth allocating the investment to alternative assets. But if you have an investment horizon of several years, I think the premium on the lack of liquidity is definitely well rewarded."
Another interesting point Lhomond makes in this context is that the lack of liquidity may also be an advantage. "In the public market, if you have to sell during a period of massive sell-offs (market downturns) then it is true that the assets are liquid, but it can be very expensive. Beyond that, alternative assets make it possible to build a portfolio that will also provide natural liquidity. For example, if you invest for a period of five years, and you receive a fixed payment in return (dividend), you can 'roll over' your investments and get back part of the money every year."
Hoping to increase exposure
What about the high fees?
Lhomond is unperturbed about the alternative sector’s relatively high fees. "Fees are not necessarily a disadvantage. If you get a decent return for a risk unit, there’s no problem in paying management fees."
Schreiber stresses that the partnership with Apollo Global will help Phoenix increase its exposure to the private debt sector: "Our exposure in the industry is 10%. We hope to increase it, but we haven't had enough opportunities so far. We have created a very successful partnership with Apollo, and it will allow us to increase the percentage of private credit from 10% to 15% in the next year or two.
"We’re now entering the second phase where we’re becoming more efficient, and working with leading and high-quality partners. Especially in the credit sector, the bigger you are, the better you are, because you have access to the best deals, and you can choose which deals to do and which not to."
To what extent are the elections in the world, for example in the US, affecting companies in this industry?
Lhomond points out that, of course, elections in the US or in other countries in the world have an impact, when the identity of the elected president may affect the promotion or non-promotion of projects such as renewable energy, but the effect may be less than it appears. "There is no doubt that we are exposed, and that is true of all types of investments. What is true is that the effect on private investment is often more specific than systemic. If, for example, you lend money to a trucking company in Alabama, it will continue to deliver goods whether Ms. Harris or Mr. Trump are elected.
"It’s clear that if there is a global geopolitical risk, as in the case of Taiwan (tensions with China and fear of invasion), then of course everyone will suffer. But in general, private investments are less exposed to risks such as elections.
Full disclosure: The conference was held in partnership with Phoenix and Apollo Global
Published by Globes, Israel business news - en.globes.co.il - on October 10, 2024.
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