Smaller investors today have a much wider set of choices for achieving immediate diversification across private real assets. Florence Chong reports

With ever-increasing specialisation in the universe of available assets, selecting the right investment has become a daunting task for many smaller investors.

A decade ago, few would have thought of investing in energy transition or digital infrastructure. Today, there is greater focus on digitalisation of economies, on environment, on net-zero commitments and on social and governance (ESG). Such asset classes have moved mainstream. In energy-transition alone, there are as many as 100 different funds. 

Multi-asset fund-of-funds managers now serve up curated platters of asset classes, offering exposure across virtually the whole gambit of the investment landscape. Offers range from primary investment to secondaries and listed and unlisted securities in infrastructure and real estate. Risk is mitigated through diversification within the asset classes, and investment takes the form of debt or equity, or both, weighing each investment on returns and risks.

Diversification in the truest sense of the word – assets, geographies, manager – is the name of the game. Accessibility is also key, as entry, particularly to some infrastructure funds, requires large outlays.

ULLA AGESEN

“When we commit to an infrastructure secondary fund of funds, they will invest over the coming 12-24 months. So now is absolutely the time to get in”ULLA AGESEN

Even if an investor can write cheques of €50m-100m – and for some this could an entire allocation – a problem of concentration is created, says Ulla Agesen, head of infrastructure at Nordic Investment Opportunities (NIO). 

“The reason for going through the likes of us is to have access to a diversified portfolio,” says Agesen. “We allow small clients to invest; our minimum is €1m, and we can go even lower.”

Catriona Allen, fund manager of the LaSalle Global Navigator Fund, says the entity has the flexibility to find the best opportunities, whether in the public or private markets, to capitalise on the performance of different sectors and different investment types. This strategy, she says, is a differentiator for her fund, which has attracted investors from the UK, continental Europe and Asia (mostly from Japan).

CATRIONA ALLEN

“Our Global Navigator team has a presence in Singapore, London, Chicago and New York. It works well for us”
CATRIONA ALLEN

Launched almost three years ago, the LaSalle Global Navigator Fund has 11 investments with a bias to residential, medical offices and life-sciences campuses. Open-ended, it had equity of US$400m (€374m) as of September 2022, and aspires to become a “very big fund”.

“We see secular trends driving growth in these sectors,” Allen says. The fund now owns student housing in the UK, multifamily in Brooklyn, New York, and specialist disability accommodation in Australia. Instead of traditional office in the US, it chooses to put its capital into medical and life-sciences office.

It also selectively invests in retail, and has recently invested in outlet centres tenanted by “high-end” brand names in the UK. This segment of the retail market was less affected by COVID, she says,

Allen is also looking at the secondaries market. “Secondaries is something we are very focused on,” she says. “There are big discounts to buy into.”

Asked how her team keeps tab of assets located in far-flung locations across different sectors, Allen says: “Our Global Navigator team has a presence in Singapore, London, Chicago and New York. It works well for us.”

She says the fund took advantage of “disrupted” global share markets in 2020 and 2021 to buy listed property securities, but adds that share markets have been “incredibly volatile” in the past few quarters, “although performance has bounced back in recent weeks”.

She says: “We take a tactical approach in terms of pricing, and we are also strategic in our investment selections. When we look at the listed market, we look for, as an example, data centres and storage. In the unlisted space, the assets are held by private equity groups which develop and own them. We don’t want to do development, so we access good companies with good fundamentals in these sectors in the public market.”

The fund is, however, increasingly investing in debt. “We see the opportunity to invest in attractive long-term debt,” says Allen. “Many managers are capitalising on dislocations today, and there is no shortage of debt products. We have a pipeline with managers working on new launches.” 

More so than real estate, infrastructure has become more attractive in recent years. Generally, the sector holds its value and continues to deliver inflation-hedged cashflows. The drawback is that assets are often big-ticket items with direct investment possible only for those with deep pockets.

Infrastructure has become a fertile ground for fund-of-funds managers, which are able to aggregate investments. They give smaller investors exposure to infrastructure, which they would otherwise find difficult to buy into.

“In general, there are still investors who are under-allocated to infrastructure,” says Agesen. “They have exposure to real estate and private equity.” The absence of infrastructure in their portfolios has been especially felt in the past year, she adds. “They realise that it would have been good to have it in there. The sector has different drivers.”

In the current ESG-focused corporate environment, Agesen says infrastructure offers good sustainability credentials, and plays a role in energy transition.

Guy Lodewyckx, head of private markets multi-management at Amundi, says: “Infrastructure is very attractive, but you need to diversify. As a fund of funds, he says, Amundi invests in other funds and with managers with whom it has developed long-term relationships.

Amundi initiated its strategy 15 years ago when it launched a diversified infrastructure fund. Other funds followed. “Our approach has not changed, but we have enriched our selection process and, most importantly, we have adapted to new market standards because they constantly evolve,” Lodewyckx says. “For example, in fees and carried interest, or technical issues, the staffing of investment teams and so on. We monitor the market and select the best market practices.”

In 2020, Amundi launched an infrastructure fund of funds known as Diversified Infrastructure Strategy to invest across sectors and geographies focusing on energy, transport, and telecoms assets in Europe. The fund has a target capital base of around €600m.

“In an infrastructure fund, the main risk is regulatory, and to avoid that the best way is to have a well-diversified vehicle,” Lodewyckx says. “When we do co-investment, importantly there is a kind of triple-filter.” 

The first filter, he says, is due diligence on the general partner (GP), which, in turn, does its due diligence on an investment. Overlaying that, Amundi conducts its own due diligence on an asset before committing.

“The upshot is strong results from these investments,” Lodewyckx says. “We have a good track record and we have had no losses at all. We have a very strong focus on the downside when we analyse co-investment opportunities.”

Lodewyckx recalls a co-investment that went through the energy crisis in the late 2000s. “It was a very difficult time for the sector, but we did finally reach the worse-case scenario – it was an 8% IRR.”

Central to the strategy, he says is a wide range of investments – up to 100 different assets for each of Amundi’s funds of funds.

Amundi also offers an outsourced CIO service to institutional investors, capitalising on its multi-asset fund-management capability under separately-managed or dedicated accounts. “Often, what we see is that the large institutions tend to manage their own allocations. The smaller ones prefer to have a manager like Amundi to do their asset allocation,” he says.

“We also see more large institutions outsource their CIO functions to firms like ours. Our CIO service covers liquid and illiquid, listed and private markets. We do multi-assets, management in private equity, infrastructure, private debt and real estate. Sometimes, we do single multi-asset funds for clients.”

Copenhagen-based NIO is in the initial phase of raising €200m for its infrastructure fund of funds. “We look to invest with infrastructure funds,” says Agesen. “We expect around 70% primaries and maybe 10% to 20% secondaries with 10-20% to co-investment.”

She says there are 10-15 infrastructure secondaries funds of funds managed by established names such as Lexington Partners and Ardian. “Our focus is core-plus and value-add,” she says. “We are not too keen on core, because we have some concerns about valuations and there seems to be a lot of competition for them. There is also the issue of regulatory risk in that asset owners may not be able to pass on the full impact of high inflation.”

NIO plans to allocate to a secondaries fund of funds, she says, noting that there is a discrepancy on price expectation between sellers and buyers on the secondary market. “There are good investment opportunities in secondaries this year and they may run into next year,” Agesen says. When we commit to an infrastructure secondary fund of funds, they will invest over the coming 12-24 months. So now is absolutely the time to get in.”

Agesen is aware of GPs looking to launch continuation funds and restructure their vehicles. These situations are of interest, she says, as well as the traditional LP stakes.

“With continuation funds, typically the management fee is low and the pricing is attractive, but to be honest, you need different resources to attack that space. We would rather team with someone who knows the space well. If we come across specific LP stakes which are of interest, we will look at those directly.”