Compelling case for alternative assets

Dania Zinurova

Wilson Asset Management

In an era of heightened uncertainty, alternative assets represent a unique opportunity for retail investors to gain diversification benefits, reduced cyclicality and exposure to the megatrends shaping our lives.

While retail investors have traditionally been locked out of alternative assets due to large minimum ticket sizes, the complexity of the assets, market inefficiency and lack of scale, there are opportunities to gain exposure to this crucial and compelling investment class.

Alternative assets are those outside stocks, bonds and cash – for example private equity, real estate, private debt, infrastructure and real assets such as agriculture, water rights, timber and energy. While "untraditional" in one sense, they have a direct and tangible impact on society.

Many are new, unique or interesting, such as real estate investments with exposure to "dark kitchens". Also known as cloud or ghost kitchens, dark kitchens are independent food preparation sites that complement unmet demand for app-based take-away food.

These providers combine advanced food preparation, cheap real estate and algorithm-driven optimisation to lower overheads – a dark kitchen is five-to-six times more efficient than a restaurant and cheaper on a per-square-metre basis. Dark kitchen customers benefit from low capital costs, low operating costs and access to consumer behaviour data, and investors gain exposure to the rental income stream without the execution risk. This is one example that highlights the breadth and depth of an alternative asset class like real estate.

Three megatrends to drive returns

As alternative investors have long-term exposure to illiquid assets, consideration of economic factors and societal trends is a key driver of success. Three examples of megatrends shaping investment allocations include the ageing population, digitalisation and demand for food.

In 2013, 14 per cent of the Australian population (3.3 million) were 65 and over. By 2053, based on ABS medium-level growth assumptions, 21 per cent of the population will be 65 and over. There is concern this ageing of the population will put unsustainable pressure on public spending, with particular concerns about rising health costs and the ability of the health system to serve the increasing numbers of older people needing care.

Healthcare real estate presents a very attractive opportunity set, with strong demographic and economic tailwinds and demand outpacing supply. This sector also offers attractive income property yield against traditional property sectors, as well as defensive characteristics and a favourable risk-adjusted return profile. As such, this sector has experienced strong capital flows and seen its share of the securitised property market steadily rise. What's changed in the last few years is that there are now high-quality institutional offerings in this space that invest in this sector at scale.

This trend is dramatic, transformational and yet the investments can be tangible. Noting a dramatic shortage of psychiatric facilities for youths under 18 in South Australia, which led to hours of interstate travel for patients, a fund manager established a designated hospital to benefit private investors and the community.

Globally we generate an astonishing amount of data and are constantly connected, whether through mobile phones or internet access. As our society and economies embrace digitalisation at growing rates, demand for digital infrastructure has increased, representing an exciting opportunity for alternative asset investors.

Today’s global economy of products and services would come to a standstill without mobile and internet infrastructure assets like data centres, fibre networks and cell towers, that are essential to financial networks, public services, consumer portals and the internet of things.

The difficulty in replicating these assets and the potential for early-mover investment opportunities makes digital infrastructure attractive. Further, data infrastructure offers the potential for long-lived and predictable cash flows. One of the first movers into this space, a US fund manager, launched its first dedicated fund to digital infrastructure, and as the sector has matured, infrastructure investors have come to see the value of this unique opportunity set. The digitalisation megatrend can also translate into strategies within other asset classes and sub trends, like venture capital and e-commerce.

Each day 200,000 people are born globally and with about 70 million more mouths for farmers to feed each year, agriculture and adjacent services, such as water rights, present investment opportunities. The increasing use of data is also driven by population growth.

Apart from strong demand tailwinds, the agriculture class offers low-to-negative correlation to more traditional asset classes. The agriculture sector in Australia contributes 3 per cent to the country’s total GDP and has potential for further investments and innovation.

Investing in water involves acquiring the perpetual water entitlements and selling or leasing the annual water allocations to end users, like irrigators, to generate income. Water entitlements on issue in Australia are capped, meaning they are limited to the current volume. This strategy delivers strong income returns, is more liquid and serves as a hedge.

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WAM Alternative Assets provides retail investors with exposure to a portfolio of real assets, private equity and real estate. The Company aims to expand into new asset classes such as private debt and infrastructure. Stay up to date with the latest news and insights from WAM Alternative Assets by hitting the 'follow' button below and you'll be notified every time I post a wire, or hit the 'contact' button to get in touch. You can also visit the Wilson Asset Management website for further information. 

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Dania Zinurova
Portfolio Manager
Wilson Asset Management

Dania joined Wilson Asset Management in 2020 and is the Portfolio Manager for WAM Alternative Assets. Dania has held senior investment roles in Australia, the US, Europe and the UK throughout her career of almost 20 years and most recently held...

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