• private equity;
• commodities; and
• alternative strategies.
Private equity is defined as an investment in either an equity of an operating company that is not traded on a recognised stock exchange, or a debt in such a company. Private equity companies provide financing to non-public companies in exchange for share of the ownership and a seat on the board. They normally exit the company and profit when the company is listed.
This investment area can be broken down into specialist areas, mainly with regard to financing the company at different stages of its growth before coming to market. For example, venture capitalists usually get involved in seeding a new company or become involved early in a venture, providing money to help grow the business.
• Strong returns, as valuations should be fully realised
• Strategic clarity, with focus on selling an understandable business
• Aligned and incentivised shareholders
• Excessive use of leverage
• Downturn in operating performance of companies
• Listed company valuations (comparators) fall
• Exit strategy unrealised
This asset class tends to polarise advisers for a number of reasons. Most clients who use a financial adviser tend to be home owners and therefore already have a large leverage property asset. It is thought that they do not need more exposure to property.
However, an asset allocator may look at property, or more specifically commercial property, as a bond proxy and therefore an income generator (ie rent) - the ‘rack and reversionary’ part of the asset class. Development property tends to be the more speculative end of the market.
• Real asset – people like bricks and mortar
• Residual value – the land may always be used for something
• Income primary driver of returns
• Low correlation
• High returns – supply outstrips demand in most cases
• Active management potential in a portfolio of properties
• Tenant default – income may not be paid and therefore expected yield lower
• Maintenance – a periodic spend or replacement value
• Liquidity – immovable, large asset that is not quick to buy or sell
Infrastructure can be defined as a basic physical structure needed for the effective operation of an economy. This can be for transport, such as roads or bridges, energy generation and delivery, water and waste management and communications to name a few.
The funding of such projects provides investors with the asset and receipt of any income generated. The building and maintenance of a toll road is a classic example of an infrastructure investment. The investor can partial fund the project with, for example, a government and once finished will enjoy the asset and any income generated for a lease period.
Infrastructure investments are similar to fixed interest securities in terms of return characteristics.