Why alternatives are a big part of the new playbook

Chris Conway

Livewire Markets

Following the upheaval in markets in 2022, several well-respected fundies have said that the coming decade will be nothing like the one just gone.

“Throw out the playbook” has been the comment. This is all well and good, of course, until you ask yourself, ‘what comes next?’

In a world where the punch bowl is being pulled, valuations in traditional markets remain stretched, and there are limited correlation benefits between fixed income and equities, what will be the new playbook, and what are the plays to be made?

Fortunately, we already have some clear evidence of one of the major ‘plays’ in the new playbook, and that is the flight to alternatives.

Whilst the Australian alternatives market remains in its infancy, the global alternative investment market was worth about US$11 trillion in 2019 and was expected to grow about 10% on average out to 2025 – when the market will be worth $17 trillion (source: Preqin).

This is a wave that Australia’s Future Fund is already riding, with approximately 45% of the portfolio in alternatives as at June 30 this year. And they’re not alone. Germany has a pension fund asset allocation to alternatives at 40.6%, while Switzerland, Canada and the UK all had allocations of over 30%.

In a world that doesn’t make sense the way that it used to, alternatives that tap into non-traditional opportunities are a way to generate performance, yield, and diversification benefits.

This is something Lucerne Chief Investment Officer, Anthony Murphy, is acutely aware of, noting that for decades, alternatives have been a portfolio staple for global institutions and family offices. 

Today, alternatives are accessible to individual investors, and an asset class that should be strongly considered given the changing market landscape. Traditional portfolios suffered in FY22, and the 60/40 model is struggling to deliver.

"Alternatives provide investors with a return profile that can be a true diversifier. Protecting capital in market drawdowns and generating returns in all market conditions is one attractive component of a well-managed alternatives portfolio", says Murphy.
Anthony Murphy, Lucerne Investment Partners

What exactly are alternatives?

This is the ultimate question, the answer to which is scarcely understood by investors. Whilst certainly not comprehensive, here is a breakdown of some of the major types of alternatives;

Private Equity

Private equity investments (typically accessed through a limited partnership) take an ownership position in companies or securities that aren't listed on public exchanges. By providing capital and expertise, investors can help new businesses grow, or restructure existing businesses to make them more efficient and profitable. Private equity is growing quickly. 

Private Credit

Like private equity, which most investors are familiar with, private credit is also enjoying rapid growth. Private credit is non-bank lending where the debt is not issued or traded on the public markets.

Venture Capital

In exchange for an equity ownership stake, venture capital investors provide funding to early-stage start-ups they expect to grow substantially. The goal is to guide the firm with the intent of selling it either through acquisition or an IPO. 

Property

Real estate has evolved to now include publicly-listed and private real estate investment trusts (REITs) and private commercial real estate debt.

Agriculture

This is a particularly interesting space in Australia, given our reputation for being clean, green and well-organised. As such, Australian products attract top dollar when sold offshore. Capital investment in Australian agriculture was up 30% in 2019 to $4.3 billion, according to the Australian Agribusiness State of the Industry Report (2020).

Others

Other types of alternatives include hedge funds, commodities, collectibles (wine, cars, art, coins), and structured products.

So, now you know

Now that you know what alternatives are, what will you do about it?

I recently had the good pleasure of attending the Lucerne Investment Partners ‘Meet the Manager’ evening in Melbourne, where a number of the managers in the Lucerne Alternative Investments Fund spoke to the group about their area of expertise and what they bring to the fund.

It was a fantastic evening and I’m happy to share with you the following insights from Mark Evans - founder and Executive Chairman of Normanby Capital and partner at HEAL Partners, and David McNamee - Portfolio Manager and Director of the Altor Alpha Fund. 

Spotlight on HEAL Partners

What does HEAL do?

HEAL Partners is a global growth and follow-on fund focused on revenue-generating growth businesses in the Health, Education and Lifestyle (hence the name, HEAL) sectors with the potential for global scale and industry disruption.

HEAL capitalises on investment opportunities created by the growing demand for quality education and healthcare from the burgeoning middle class and rapidly aging population, the disruptive impact of technology and new specialties in developed markets.

Specifically, HEAL targets opportunities to invest in emerging leaders, emerging niches, growth segments and sustainable solutions, and participate in scaled disruption and consolidation within these sectors. 

Key geographies HEAL focuses on include North America, Australia, and Southeast Asia

What benefit does it provide to investors?

HEAL was founded and is led by a group of proven founders, operators and experienced investors in the health and education sectors. A number of the HEAL investments have been created by the founders, and the team's track record gives HEAL access to unique, proprietary deal flow, which results in preferential access and terms for HEAL’s investors.

HEAL gives investors access to a unique, globally-diversified portfolio of fast-growing emerging leaders in the health and education sectors with the potential for global expansion. These businesses benefit from HEAL’s active management approach and extensive network as they scale up their operations across markets.

HEAL Fund 1 was launched in September 2020 and raised A$ 200m, double its initial target. Thus far, HEAL has completed nine investments and committed over A$170m to these businesses, with the remaining commitments reserved for follow-on investment into the current portfolio.

"We are very pleased with the construction and performance of the portfolio to date – all the portfolio companies are growing strongly and experiencing strong traction in the markets that they are active", says Evans. 

Given the success of Fund 1, HEAL have now launched Fund 2 with a target capital raise of US$350m to US$500m, with the well-known Elliott Investment Management a strategic investor supporting fund 2.

Spotlight on Altor Alpha Fund

What does Altor do?

The Altor Alpha Fund is a diversified micro-cap fund that aims to generate superior returns by focusing on special opportunities that are outside of the ASX300, and have near-term catalysts. The Fund can invest up to 20% of the portfolio in private companies to capture uplift from pre-IPO catalysts, and invests across a broad range of sectors.

What benefit does it provide to investors?

Investing predominantly in sub-$100M market cap companies, the Fund operates in a space typically dominated by small traders and private investors, where applying a disciplined and patient investment approach provides several opportunities to generate superior returns.

David McNamee and the Investment Team have strong and extensive networks in the space, allowing the Fund to access unique opportunities, as well as access management teams. This allows the investment team to deeply understand the impact and value of potential catalysts.  

"Through discipline in applying the investment process and maintaining a diverse portfolio, the Fund has consistently surpassed its goals", says McNamee.

The Fund has almost four years of track record and has delivered investors with superior returns over that time. As at 30 September 2022, the Fund has returned 30.45% p.a. for the previous 3 years, and 44.16% p.a. since inception (March 2019). While a 2020 calendar year performance of 111.12% is noteworthy, the Fund has done comparatively well in the recent drawdown compared with the sector.


If you would like to know more about the Lucerne Alternative Investments Fund, you can do so by clicking on the card below. 

Managed Fund
Lucerne Alternative Investments Fund (Fee Class 1)
Alternative Assets

Learn more

Lucerne Alternative Investments Fund (LAIF) was recently awarded ‘Best Multi Strategy Fund’ at the 2022 Australian Alternative Investment Awards. Providing investors access to an actively managed portfolio of funds designed to have a low correlation to equity markets, you can find out more here.

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Chris Conway
Managing Editor
Livewire Markets

My passion is equity research, portfolio construction, and investment education. There are some powerful processes that can help all investors identify great opportunities and outperform the market, and I want to bring them to life and share them...

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