Balancing risk and reward: The secret to alternative investments

Alternative investments are opening up new opportunities for institutional clients and private wealth investors, but how strong is the uptake and what is holding back the industry? We catch up with Katja Lammert, CIO Alternative Assets at MEAG, to discuss the state of private markets, opportunities, and investor sentiment around this asset class.

Top takeaways

• Experience matters – an established asset manager can be a great ally when starting out.
• Alternative assets can provide stability – with their quarterly valuations, alternative assets can be a steadying addition to portfolios, and the right assets can help manage market risk.
• Infrastructure investments can be ideal – this sector is always looking for inflows and can be attractive to the right investor.
• Private wealth access is improving – though still more restricted than institutional access due to regulatory protections.

Let’s start off with the general trends shaping alternative investments today.

I think what’s driving private markets right now is private debt, because it is of interest to institutional clients. It has a good returns and favourable Solvency II treatment.

A lot of investors are still just dipping their toes in – what’s your secret to knowing alternative investments so well and feeling confident navigating them?

We’ve been investing in alternative assets for a long time now. We made our first private equity investment in 2006. Our strategy is to start with fund investments and a dedicated financial perspective. Once we’re familiar with that, we dive deeper into technical and legal aspects, then go further and engage in co-investments and then direct investments following megatrends that drive the markets.

We have access to a team of experts who enable us to dive deep into those assets, with front office capacities, risk management, legal, etc. If you have that kind of broad expertise at your fingertips, it’s easier to make a judgement.

Nothing beats experience, but how do you think somebody might start out today in investing in alternatives?

The best approach is to find yourself a good asset manager, because you shouldn’t start investing in alternatives on your own. For instance, for a private equity firm looking to diversify, fund investments are a good start. Personally, however, I would not recommend starting with the risky end, but rather in the middle or at the lower end.

What’s the role of alternative investments in portfolio diversification, especially as markets are fairly volatile?

A lot of alternative assets are not as volatile as equities. Stocks move on a daily basis, whereas private equity has a quarterly valuation, so alternative assets have a stabilising effect.

So it’s always good to have some alternative assets on the balance sheet that are not volatile. For example, we invest in forestry, and forestry has no or almost no correlation to traditional assets like listed stocks or fixed income. That is a good way to diversify your portfolio.

As the market opens up to more people, how do you see private wealth partnerships developing?

Private wealth is coming into the market more slowly than institutional clients. Institutional clients have easier access because the regulation is more liberal for them. But private asset classes and alternative assets are becoming more open for private wealth clients and it’s an interesting structure for them to invest in.

If a private client asked me “what alternative assets should I invest in”, for example with their retirement money, I would always say infrastructure. Infrastructure is inflation-protected, for example, and a long-term investment. While listed equity can be sold on a daily basis, this is usually not possible for infrastructure. However, on the upside this allows long-term oriented investors to benefit from an illiquidity premium.

That makes sense for private wealth. In the past it was quite difficult for private wealth to gain access to alternatives, and it’s still not easy. Alternative assets, in some instances, have a reputation for being “too risky” or “too sticky” or “you can’t sell it”. That’s the reason why most regulators think they have to protect private wealth from alternatives, making it a difficult asset class to access to a certain level. You have to be cautious.

On the other hand, alternatives have a lot of advantages, which is why it’s smart for regulators to open them up to private wealth. It can make total sense to invest in infrastructure, like for retirement funds. When you look at the infrastructure market and find out the kind of money needed in Europe (or wherever) – it’s a lot if you want to cover private growth infrastructure, public, etc. The more funding infrastructure can get, the better it becomes.

We’ll be discussing alternative investments at IMpower FundForum. Is there anything in particular you’re looking forward to learning about?

I’m really curious about the thoughts of other firms on private wealth topics because alternatives are still difficult for individuals to invest in. It’s easier than it was in the past, but I’m curious to hear different thoughts on this. In a recent discussion, I met someone who was all-in on listed stocks for private clients, whereas I was for infrastructure investments. I think we have plenty of discussions ahead of us.

Join Katja Lammert and 1,500+ leaders in asset & wealth management at IMpower FundForum this June.