Looking for new asset classes
The main objective of family offices is the preservation and growth of wealth to ensure long-term recurring income for generations to come. Traditionally, these goals have dictated investment strategies, favoring relatively safe asset classes with reduced risk and lower but regular payouts. As a result, real estate, stocks and blue-chip bonds made up the bulk of most family office investment portfolios.
In recent years, driven by the low interest rate environment, improving capabilities on the investment management front and the need to hedge against bonds and equities, family offices have broadened their scope to include alternative investments in their asset allocation. As a result, many are actively seeking new opportunities in emerging asset classes, some of which are based on traditional asset classes, while others are entirely new. Here is an overview of the emerging asset classes that are attracting attention in the realm of alternative investing.
Recurring income as an asset class is based on traditional fixed income securities, but with higher liquidity and diversification. It allows investors to invest in fixed-income-like products for recurring income streams.
Many SaaS and subscription-based e-commerce companies are realizing that equity and debt are not optimal ways to fund growth. Therefore, choosing to trade their monthly recurring income to secure upfront income without dilution or debt burden is becoming more and more attractive.
These deals are traded through platforms like Pipe that provide capital markets with direct access to start-ups, start-ups, and publicly traded entities. Pipe has a proprietary rating model, similar to Fitch/Moody’s ratings for bonds, which provides investors with a uniform way to assess recurring revenue. It incorporates hundreds of anonymized data points about each business, including revenue, burn rates, and customer cohort performance. It also gives investors a complete and transparent view of the underlying activity for each recurring income on the Pipe trading platform.
Michal Cieplinski, Chief Commercial Officer of Pipe, explains the benefits of using the platform: “Family Offices face an ongoing struggle to find assets and match them to their return expectations. Over the past few years , equities and fixed income moved in the same direction and are highly correlated. Cieplinski also points out that return expectations were not in line with what was traditionally available in the market: “With the introduction of recurring income on Pipe’s trading platform, Family Offices can now access a stable, capital-preserving asset class with returns far exceeding current fixed assets. income returns, thus better matching their return expectations. »
The COVID-19 pandemic has changed the way the world works. Currently, businesses are evaluating what returning to the office might look like in the future when evaluating their existing spaces. All indicators point to a massive shift towards hybrid workplaces, with greater flexibility becoming the norm. A joint study by CoworkingResources and Coworker predicted that the flexible office space industry “will rebound in 2021 and grow even faster from 2021, with an annual growth rate of 21.3%.”
Coworking spaces are thus rapidly becoming an emerging asset class. They are considered a separate asset class due to their unique risk profile, with the primary variable being based on the tenant’s ability to pay rent. According to Lucas Rotter, CEO of appraisal software developer Valcre and a former appraiser for a wide range of asset types at Collier, coworking has similarities to hotels. He says, “It’s about the hotelization of office space. With hotels, you have a higher cap rate range than you typically have with office space. Specifically, because leases overnight leads to higher risk tolerance.”
Cryptocurrency, digital assets and blockchain
The ever-expanding universe of digital assets currently has an estimated market value of $2 trillion and a user base of over 200 million. This makes digital assets a leading emerging asset class for family offices looking for alternative options. Additionally, the fact that cryptocurrencies and digital assets are uncorrelated to any other asset class makes them an attractive choice for diversifying family office portfolios.
According to Jodie M Gunzberg, Managing Director of CoinDesk Indices, this is exactly what is happening: “We have heard massive interest in digital assets from family offices as they look for opportunities to diversify, generate income and have the potential for upside amid inflation concerns. , rising rates and COVID, which can have a significant impact on the value of their traditional assets like stocks and bonds. Additionally, for ESG-focused family offices, there is strong potential to influence the acceleration of sustainable energy. »
While Bitcoin is the most renowned cryptocurrency with a significant market value of around $900 billion, according to Candace Browning, head of BofA Global Research, “It’s not just about Bitcoin anymore. digital assets, and that’s creating a whole ecosystem of new businesses, new opportunities, and new applications.”
Blockchain is an enabler of many of these new asset classes. Not only is cryptocurrency trading inspired by it, but the technology is also rapidly being adopted across multiple verticals as added value for businesses. Venture capitalists’ digital assets and blockchain investments totaled $17 billion in the first half of 2021, a significant increase from $5.5 billion last year.
As the war on climate change escalates, carbon trading is emerging as a new asset class. The carbon market grew by more than 20% in 2020, its fourth consecutive year of growth.
Two main markets exist: Compliance Carbon Markets (CCMs), where mandatory national, regional or international regimes trade and regulate carbon allowances, and Voluntary Carbon Markets (VCMs), where companies and individuals voluntarily trade carbon credits. CCMs are the more mature of the two, with VCMs just emerging. CCMs are valued at over $100 billion with annual revenue exceeding $250 billion. VCMs were valued at $300 million in 2020.
According to the CFA Institute, “Emissions Trading Schemes (ETS) are a climate policy instrument designed to provide efficient carbon pricing. Carbon traded in these markets can be considered an attractive asset class with well-understood risk premium factors”.
Although institutional investors have played a limited role in these markets, the situation is changing. Trading carbon credits helps organizations achieve their net zero carbon goals, supports the global climate agreement, and helps protect the environment. For family offices whose mandates focus on diversification towards sustainable investments, this is an attractive opportunity to enter an immature but growing market. However, as with many sustainable investments, greenwashing is common, so it is highly recommended to seek advice from experienced advisors in the field.
Like fine art and vintage wines, collectibles like sports memorabilia, Pokémon cards, non-fungible tokens (NFTs), and Funko figures (FNKOs) are all part of a new class of emerging assets. The collectibles industry is estimated to be worth $412 billion in 2020 and is expected to reach $628 billion by 2031..
Digital NFT Market Collectibles is the fastest growing segment with a CAGR of 14.2% during the forecast period. Some products in this segment are experiencing growth of up to 1,400% over a quarter (or approximately 14 times the market). Given these facts, it’s no wonder venture capitalists and market giants are entering the market and family offices are following their lead.
As current market trends continue, the search for yield is driving family offices to explore more speculative asset classes than ever before. It’s equally daunting and exciting, but it’s clear there are opportunities to be had.