Written by Jonny FryWriters linkdin: https://www.linkedin.com/in/jonnyfry/
According to the specialist data research firm, Prequin (used by asset managers globally), interest in alternative assets has been growing. By 2025 they are set to be worth over $25trillion. From January to September 2021, venture capital investors have invested over $15billion into businesses engaged with blockchains, the majority of which are private.
Alternative assets cover a wide range of investment opportunities such those listed below, as well as cars, jewellery, art, cryptocurrencies and unquoted shares (i.e., private companies) etc.
Institutional investors’ main reasons for investing in alternative assets
Source: Prequin.com
As can be seen, diversification and lower levels of volatility are two reasons often given as to why institutions invest in alternative assets. Investors need to exercise caution, though, when looking at historic measures of volatility and ensure they are comparing like with like. On the face of it, unquoted shares in private companies can appear to be less volatile than a quoted equity because quoted shares are priced daily. Unquoted shares in an investment trust/single country fund (i.e. fund) will typically be revalued quarterly, or maybe monthly. Therefore, at first glance, a fund that invests in unquoted shares may appear to be less volatile than a fund that invests in daily valued quoted shares. Cryptocurrencies, too, can appear to be more volatile simply because they are traded 24/7/365, as opposed to some other alternative assets - cars, art, real estate, or funds such as hedge funds, private equity funds or infrastructure funds - as these are typically revalued weekly, monthly and in some cases, quarterly.
Interest from institutions in unquoted shares has been gaining momentum as can be seen by Danish pension funds which have invested more capital into unquoted shares than quoted shares in the last three and a quarter years up to March 2021. One way for smaller investors and the general public to become involved with alternative assets such as unquoted companies is by considering investment trusts. Unlike a mutual fund, which gets larger or smaller depending on the amount of capital that is invested, investment trusts are established and capital is raised. It is then usually agreed that the entity will be wound up after seven or ten years and the capital be returned to the investors. In the meantime, the money in an investment trust can be invested into illiquid assets (such as unquoted shares) on the basis that, in a few years’ time, the unquoted company will either be acquired or potentially listed on a stock exchange.
Record year for investment trusts fund raisings (£Billion)
Source: AITC
As the above chart demonstrates, 2021 has been a record year for investment trusts - many of which tend to invest in unquoted alternative investments. According to Investors' Chronicle, sectors proving to be popular in 2021 for investment trust managers in which to raise capital include space, infrastructure, renewable energy and digital infrastructure.
Increasingly, there are more digital versions/wrappers of traditional and alternative assets being issued and traded on recognised digital exchanges, such as Six in Switzerland, Archax in the UK, and in Malaysia - Luno Malaysia Sdn. Bhd, MX Global Sdn Bhd, SINEGY Technologies (M) Sdn. Bhd and Tokenize Technology (M) Sdn. Bhd- to name just a few. The fact that there are now an increasing selection of regulated digital exchanges they can trade on is enabling institutions to become more dynamic in buying and sell digital assets and will potentially allow alternative assets to become more liquid and accessible to a greater number of investors.
