This article first appeared on Citywire Switzerland on May 10th 2019.
Between the return of volatility and the pause in rate hikes from central banks, navigating traditional equity and bond markets has proved a tricky task. Demand for outperformance from clients, along with a rise in passive competitors, has turned up the heat, and wealth managers are feeling the pressure.
Statistics from BlackRock show that institutional investors are flocking to real assets, private equity and real estate, while a recent Credit Suisse report has also found that demand has been increasing for custom alternatives mandates, suggesting that the asset class may be becoming a more permanent holding in portfolios.
According to Philippe Naegeli, co-founder and CEO of Swiss securitisation fintech firm Gentwo, this trend towards alternatives is marked by many wanting to invest in atypical, non-bankable assets.
‘Since 2008, we have lived in a different investment world. Lots of factors have changed – states have become really involved in monetary policy, and we’ve had a change in markets overall. Clearly with interest rates trending towards zero or even negative territory, a lot of classic investments have not been able to return as much as investors were expecting.
‘I think a lot of investors turned towards alternatives, and especially non-bankable investments. It started with real estate and gold, and then private equity and private debt. It added all kinds of raw materials, and lately it would be crypto or the blockchain movement,’ he said.
Gentwo offers its clients the ability to securitise anything, giving them a way to establish an off-balance-sheet product that they can arrange as they would like without going through a bank. Naegeli told Citywire Switzerland that the firm was launched because the demand for non-bankable assets to become investable and transferrable had become ‘enormous.’
He explained that 65% of all business at Gentwo is focused on non-bankable assets, and that number is increasing all the time.
‘On the non-bankable side, I would say it’s mostly in private equity, private debt and peer-to-peer lending. Then we go into smaller topics such as art, vehicles, forestry, cattle farms and diamonds.’
An investor’s best friendDiamonds are an atypical investment that garnered attention in 2018, with the launch of the world’s first physical diamond fund by Blue Sky Alternatives.
The fund was launched by Michael Bonke, CEO and founder of the firm. Bonke owns a diamond polishing company in Pondicherry, India, and is also a member of the Kring of Antwerp, the largest exchange for rough diamonds.
Bonke told Citywire Switzerland that several factors came together to present an opportunity to launch a diamond fund – first of which was the current market conditions.
‘Right now, investing in physical assets is very interesting. We are at the end of the longest cycle of a growing economy, and as you know, it all goes in cycles. Everyone in finance is waiting for the next crash.
‘In 2008, we had total investments globally of $4 trillion. Today, we have $18 trillion. So what happens when the next crash comes? Nobody knows. If you’re in physical assets, you’re out of this risk. It’s diversification,’ he said.
Bonke explained that diamonds are a prime physical alternative when compared with their counterparts such as race horses. He calls diamonds the ‘ideal commodity’ thanks to their increasing scarcity.
‘Diamonds are limited. There have been no new diamond mines detected in the past 15 years, and total global production is receding,’ he said. ‘In 2006, we produced 180 million carats, and now we’re down to 140 million per year. Supply is going down, and demand is growing.’
Forging a new wayAccording to Naegeli, investors are looking for what they have always wanted: growth.
Hunting for growth opportunities remains their main driver, and if it means investing in real estate, cattle farms or diamonds, it seems managers are willing to take the leap to reap returns.
‘People look for growth, and new ideas,’ he said. ‘I think that is something humans will always have – they are looking to create something new. They want to find something that they can specialise in.’
What’s more, he believes that a rocky market has led managers to take a more broadly diversified approach in order to protect and grow assets.
‘Investors want to diversify,’ Naegeli said. ‘That’s probably the main topic for every investor, and so it became the main topic for every financial professional and financial intermediary. That can be vehicles, land, forests – everything you can own can demonstrate value, and anything that can demonstrate value can deliver returns.’