We live in a new world. Creating new investment products, adapting allocation.
The world as we know it has changed, the way we invest changed, and so is our perception of risk. The Covid-19 pandemic has blurred investor’s vision of the future, and in many ways has given them time to reflect on the way they have been investing and what alternatives exist in the investment world to diversify their risk.
The pandemic has accelerated some sectors, mainly the digital world, a variety of new ideas have emerged and have come to the market, and some actually turning into successful new investment vehicles.
Where can I get higher return and diversify my portfolio?
While there are many instruments that come under alternative investments, let’s focus on venture capital funds and real estate funds or REITS, the two current hot topics in the investment world and two that offer diversification.
The first tackles the changing world and the new technologies that emerged to accommodate new consumer needs and the second tackles, predominantly, inflation and rising asset pricing.
VC funds
The digital world has led the way to new technologies and the emergence of new companies that have cleverly adopted these to attend to consumer needs, be it healthcare, security, F&B, and the list goes on.
But as an investor how do you allocate to these various sectors, do you have time and expertise to study the ins and outs of each sector, the founders, operational efficiencies, cash flow management, threats the competitors pose and more importantly, the survival probabilities of these great ideas? That’s how VC funds were born. They fill a real gap in the market and solve a challenge that investors face.
VC Funds identify the best start-ups in each sector, they assist them operationally, they help them fund raise and market their products and support institutionalising their business, while providing the investor the right mix of diversification to fit their risk profile and maximise returns.
Typically VC funds founders spend the majority of their time selecting portfolio companies, negotiating investments, fund raising, monitoring portfolio companies, acting as their consultants, assisting in recruitments and finally securing exits for their investments. This requires a high level of expertise in all these fields.
There are over 1,000 VC funds in the United States currently, according to the National Venture Capital Association
Where are these VC funds located? How do I find them? And what return should I expect?
The US has led the way in VC funds, there are over 1,000 VC funds in the United States currently, according to the National Venture Capital Association.
But VC funds are not only typical in the US, the Middle East has seen many success stories and has managed to get on the world map in terms of successful deals in that sector, but only in the past business cycle, ie six – seven years, that this trend has accelerated.
This could be viewed as late in the game but in reality VC funds only emerge once the start-up landscape has matured and grown to a level that grants such funds access to enough deals to secure a large enough portfolio of companies.
In terms of return, typically a VC funds returns anything between 15 percent and 27 percent yearly, a clear higher return than traditional investing in plain vanilla products. These returns clearly indicate the risk associated with such investments.
The rule of high risk high return very much applies here, and why diversification of sector allocation is crucial to ensure a balanced portfolio and help ensure some return to investors.
REITS
The other alternative investment product we will discuss in this piece are REITs, Real estate investment trusts, a vehicle that helps expose investors to the real estate sector through equity or debt, in a fund structure.
Most mature diversified portfolio will have real estate as part of it. Bricks and mortar as we were always taught is never a failing investment. One of the most complex asset class is real estate, if incorporates equity, debt, a transaction cost element, expense of maintenance and many other factors.
Singapore is the second largest REIT market and now offers listings to REITs who manage assets from around the globe
Where is the opportunity?
The REIT market is very large in the US, with over 250 listed REITs currently. It is also a highly regulated market, mainly as it attracts a large number of investors and it answers a liquidity challenge, given that REITs are listed instruments.
Singapore is the second largest REIT market and now offers listings to REITs who manage assets from around the globe, attracting REIT managers due to the business friendly regulatory framework and easy accessibility to the Singapore stock exchange.
The Middle East has started to grow its REIT market recently, in the past five years or so. The market is still young for that asset class, although maturing, and the necessary education of investors about the intricacies of REITs have proven to be complex and lengthy, albeit necessary.
What other alternative investments are out there?
Various other alternative investment vehicles have emerged in recent years, NFTs and tokenisation to name a few. With many new products emerging, investors can no longer afford to lack education in them or allocation in them.
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