Bespoke Strategies in Alternative Investments
A Focus on the Middle Market
In today’s environment of low interest rates and uncertain economics, investors are challenged to find return-enhancing investment vehicles that fit their risk parameters. Simultaneously, they are seeking asset types that have a low correlation of returns versus their existing allocations.
Alternative investments are increasingly being employed to accomplish these objectives.
Mainstream alternatives may fall short of return expectations, however, when fund sizes reach into the billions of dollars. Simply put, to deploy such large sums, funds cannot be as selective, eventually driving down average returns. Such funds often have very high minimum investment levels that are out of reach of many high net worth investors and their advisors.
A better approach is to seek out niche strategies whose returns are driven more by execution at the micro level than by trends and fundamentals at the macro level. Such characteristics are inherently more likely to produce returns that are less correlated with those of the listed equity markets. And so- called “lower market” investment vehicles that retain flexibility and nimbleness can pursue opportunities that would not be feasible for larger funds. The inefficiencies present in the lower market simply do not move the needle for them.
Altera Investments has established its niche in lower market investment opportunities where these characteristics are evident and can drive returns and determine risk characteristics. A few examples will shed further light on this approach:
- Unique fundamentals in off-market self-storage: Altera was favorably disposed to the unique fundamentals in small-market, lower service, self-storage facilities, that generally had less competition. The firm’s search produced two skilled managers with complementary strategies, ultimately creating a fund with strong cash flow characteristics and appreciation potential from upgrading these facilities.
- Gaining access to renewable energy partnerships: Altera’s research identified a manager of renewable energy partnerships with a great track record in a small corner of this market. Their funds were open solely to qualified purchasers. Altera negotiated favorable terms and pooled sufficient investor dollars to justify the manager creating a parallel vehicle for accredited investors, greatly broadening the number of investors who could participate in this impact sector.
- Niche credit opportunities in the lower market: Altera identified a credit strategies manager with a strong track record of lending to mid-sized private companies that meet the team’s very specific criteria. Their strong credit culture and negotiating skill created favorable risk/return characteristics in a potentially fraught sector. The resulting vehicle has strong investor cash flows and potential for appreciation from equity “kickers” attached to these loans.
Altera’s specialty in off-the-beaten-path alternative investment opportunities in the middle market complements investor allocations to mainstream alternative and public market investments. We work with family offices, high net worth investors and registered investment advisors who value our unique perspective and deal flow.
We welcome the opportunity to discuss how this approach might complement your current allocations.
By: Scott Sadler, CFA
Director of Impact Strategies
