Westbrooke Alternative Asset Management
In a market characterised by high asset prices, global political and economic uncertainty and low interest rates, SA wealth managers are increasingly looking beyond traditional investments to include alternative investments in their higher net worth clients’ portfolios.
According to Dino Zuccollo, head of product development and distribution at leading SA-based alternative asset manager Westbrooke Alternative Asset Management, South African investors are beginning to track the international experience. “Globally, alternative investments already comprise an $11 trillion industry, which is expected to grow to $17 trillion (54%) by 2025*. Interestingly, South African investors are picking up on this trend, rapidly increasing their allocations to the asset class. This is most prevalent amongst our wealth manager and high net worth client base, who are driven by the need to enhance returns and decrease volatility in an increasingly uncertain world,” he says.
This is echoed by Matthew Norwood-Young, co-founder of Anchor Capital: “The domestic equity market is a challenging place to extract value. At the same time, global interest rates are at all-time lows, which makes it complicated to hold large amounts of cash. This is where alternative investments can help, by delivering returns which are uncorrelated to the listed markets.
“Including alternatives in a portfolio also protects against panic or greed in investment behaviour. We recommend them to more sophisticated clients and have seen excellent returns, such as the 7.2% annual yield which can currently be achieved by investing in Westbrooke’s UK private debt fund in comparison to the less than 2% p.a. which is currently being achieved in comparative offshore fixed income products.”
Zuccollo unpacks alternative investments which are not yet widely known or accessible in SA, “Alternative investments comprise assets or investment strategies that do not fall into the traditional investment categories of equities, bonds or cash. There is a wide spectrum of alternative investments available, which range from lower-risk strategies which often comprise private market forms of traditional investments, such as private debt and direct real estate, all the way to higher risk alternatives such as venture capital.”
Craig Gradidge, co-founder of Gradidge-Mahura Investments adds: “Although alternative investments are still in their infancy as an asset class in SA, there are pockets that are particularly attractive showing good returns. We prefer to deal with the larger product providers to better manage risk. As advice professionalises, and wealth managers become more comfortable with this asset class, we will see higher allocations. Currently Gradidge-Mahura is allocating about 5 – 10% for more sophisticated clients. There’s definitely a need for education of both advisors and clients to grow the sector further.”
Historically in South Africa, investors in alternatives have tended to comprise institutions, family offices and ultra-high net worth investors, although there is an increasing trend for the asset class to be made more widely available. Despite the lagging local take-up rates, the international experience has been significantly different. A 2020 report by UBS indicates that the last 30 years has seen a steady growth and acceptance of alternative asset classes in client portfolios. For example, the average allocation to alternatives amongst a sample of 121 global family offices amounts to 35%, with this ratio increasing to as much as 75% in the case of specific investors, such as the Yale University endowment.
Most popular alternative investments
According to a 2021 report by Prequin, the three largest alternative investment classes are private equity, direct real estate and private debt. Family offices have the highest investment in private equity, with a median allocation of approximately 20%.
Private debt is now the third largest alternative asset class in the world and has grown in popularity as investors have intensified their search for fixed-income alternative investments whilst global interest rates have remained at record lows. Over the next five years, private debt is expected to grow at a compound annual growth rate of 11.4% per annum.
Hedge funds are expected to benefit from the general move to more actively managed funds amongst investors in the future.
Before investing, clients need to consider that alternatives are generally unlisted, complex and subject to lock-in periods during which time investors are unlikely to be able to access their capital. However, these same lock-ins (which some perceive as a downside) may promote better long-term decision making by reducing the likelihood of the short-term panic behaviour which is often created by short-term price swings in the listed markets.
Furthermore, alternatives can be structured to be more tax efficient for investors. Fees tend to be higher due to complexity (alternatives are far more difficult for managers to implement than traditional assets), but investors are often rewarded with higher returns. These higher fees can be managed, by increasing the prevalence of outcome-based fee structures, which generally align managers to perform. Finally, alternatives generally have higher minimum investment sizes.
Well known international alternative providers include Blackstone, KKR and Brookfield but in South Africa Westbrooke Alternative Asset Management is the leading provider across multiple asset classes and geographies.
“The need for enhanced returns, increased portfolio diversification and decreased volatility is a significant driver of alternatives at present. The bottom line is that alternatives help to reduce risk by generating returns which are uncorrelated to the traditional investment markets. At Westbrooke, our focus is to leverage our highly experienced investment team, decades of experience and heritage as a shareholder and operator of assets to provide our clients advantage when investing with us, be it in private debt, hybrid capital, real estate and private equity / venture capital in South Africa, the UK or the USA,” adds Zuccollo.