Outbound investments: Giving real assets a real place
Real assets may be described as one of the key pillar of alternative assets whose tangible characteristics bodes well with medium and long term capital. Except for real estate and corporate investments, funding for infrastructure emanated mostly from governmental agencies, bond offerings and/or institutional debt and equity capital. With the deterioration of the physical assets from subways in New York, to bridges across America, to subsidies for renewables, to upgrades of US airports, the pent-up demand for private capital in real asset investments will only accelerate. According to a recent Mckinsey study, the estimated capital needed globally total over USD $50 trillion including emerging and frontier markets.
Though real assets include cash, receivables, real estate, factories, equipment, roads, infrastructure and natural resources, its broader definition may encompass oil and gas, renewables (solar and wind), hydro plants, cell towers, data centers, transportation channels and terminals, urban farms, waste to energy facilities to pet finance.
Take a mega example of the Belt and Road Initiative (BRI) Infrastructure whose grand strategy will produce benefits linked to energy, commodity security, trade and economic development. The reach of BRI will touch 64 states, 4.4 billion people and 29% of world GDP.
The benefits of private capital can be further illustrated from smaller greenfield and brownfield projects. Take the recycling of rubber tires to special composite materials or desalinization plants in drought stricken places or rooftop solar in homes in Africa where the build out of the grid is too expensive.
Much like the growth of private equity fueling corporate and real estate investments, infrastructure and real asset private investment will see a similar exponential trajectory as municipal government will increasingly turn to private public partnerships and private bonds to finance these projects.
A historical perspective of private equity illustrates the power of private capital. In 1980 there were 24 private equity firms with AUM exceeding USD $1 billion. By 2016, more than 3,000 firms with AUM of $825 billion reaching a new zenith. Just in the past 3 years, $500 billion were raised each year. The footprint that private equity touches is overwhelming. As an example, there are 6,004 companies listed on NYSE and NASDAQ compared to 7,580 companies operated and owned by private equity firms. Of the 10 largest for profit employers, seven (7) are owned by private firms.
From the perspective of Asian institutional and private capital, why are outbound investments in real assets skyrocketing? A historical perspective is appropriate to understand the outflow of capital. The West financed and invested in the mega growth of Asia ranging from roads to plants to technology. Now the reversal of capital flow is occurring. We are seeing the early stages of capital flow to the West. Other than the strategic investments of Wanda’s acquisition of AMC theater chain, or Anbang’s buyout of Waldorf Astoria Hotel, structured real asset investment, be it debt or equity, will be more common as Asian institutions look higher risk adjusted returns. Cap rates for trophy buildings in Seoul to Beijing to Tokyo hover in the 3% range. Corporate bond yield in Korea, for example, equal some 2.0%. And the yield on same corporate bond in Japan touches 1% - 1.5%. The dwindling yield in the traditional bonds and equities in their local country are fueling the speed at which capital is flowing to the West seeking stable returns.
The tsunami of outflow capital flows into private markets in OECD and emerging markets had hardly began. As yields continue to compress in the region, Asian capital will continue to flow into structured real assets which acts like a fixed income surrogate. Insurance companies and pension funds alike must rotate their investments from traditional bonds into asset backed assets.
John F. Tsui, is Managing Principal of Peninsula House, LLC, which is a single family office engaged in fund investment, separate accounts, as well as direct investment across alternatives. In addition to investments that produce outsized returns relative to risk, we are engaged in fixed income in private markets, be it hydro plants, sale leasebacks, private credit, cell tower portfolio, transition secured debt capital and infra debt. Mr. Tsui obtained a BBA in Hotel Administration from Michigan State University and a Masters in real estate from Columbia University. He also earned an OPM from Harvard Business School.
