The Changing Face of Real Asset Investments

Real assets have long been viewed as stable investments and have diversified institutional and individual portfolios for decades. Such hard assets are defined as tangible and physical ones that have value due to their substance and properties.[1] Unlike financial assets, which are based on a contractual claim, like equity or debt, real assets have intrinsic value.

While real estate is the most common, aviation-related assets, shipping vessels, infrastructure, agricultural land and timber, also fall into the real asset category. Similar to private equity venture funds, real asset funds are typically closed-end with a finite life and hold illiquid investments. They differ from their venture private equity relative in that the real asset fund generates income through leasing/renting an asset (i.e., aircraft or shipping vessel) in addition to providing investors with any gains from appreciation in value. Shifts in favor of one real asset class over another is largely driven by specific trends that influence the best opportunity for capital appreciation.

Trends influencing the real asset market

While most real assets are influenced by similar trends, some real assets, like agricultural land[2] or infrastructure[3], tend to be less correlated to economic changes, which may be advantageous in an unpredictable economic environment as compared to a financial asset or real estate.

Fueling a growing population

According to a June 2017 United Nations report, the current world population of 7.6 billion is expected to reach 8.6 billion in 2030, 9.8 billion in 2050 and 11.2 billion in 2100.[4] It could be said that the increase in the number of consumers proportionately increases the requirements for most tangible assets. Specifically, the growing population drives demand for real assets for food production and farmable land. Similarly, environmental advocates searching for alternative sources for fuel and land to grow biofuel-producing crops also drive demand. Both of these have increased investment opportunities in agricultural land. One way biofuels are being used is as an alternative to jet fuel to solve for carbon emissions from air travel. In 2016, United Airlines announced a new initiative to integrate biofuel into its energy supply with the hopes of reducing greenhouse gas emissions by 60 percent[5].

Alternatively, power plants with long-term purchase agreements, and power transmission grids that serve stable population centers, present opportunities in infrastructure investment.[6] As the U.S. continues to transform its power grid it will need $2.1 trillion of new investment through 2035. Wind and solar farm owners, and the land to host them, will benefit from the capital and need it to establish the network to transmit the power.[7]

Real assets survive natural disasters and economic changes

Globally, natural disasters in 2017 caused an estimated $306 billion in total economic losses. Global insured losses made it the third most expensive year for the insurance industry.[8] Devastating floods, fires and hurricanes contribute to a myriad of issues - loss of life and real estate, financial market impact. However, infrastructure’s value is less correlated to such events as its value may neither strongly increase nor decrease based upon larger economic trends⁶; and it continues to be part of savvy investors’ portfolios. Additionally, the resulting need to rebuild damaged infrastructure provides an opportunity for investors.

Lower interest rates and corporate bond yields have made buying and leasing of real assets an attractive alternative for individuals and institutions while providing new opportunities for real asset fund managers. For example, according to the Financial Times, returns on investing in a plane between five and ten years old is typically about 10% while yields on the investment-grade bonds of major airlines are about 4% ⁵

Other real assets – such as cell towers and music royalties are equally impacted by these trends; and will be explored in a future SS&C blog.

Choosing the right administrator

Each real asset has its particular nuance and expertise is required. The fund structures holding these assets are complex, employing blocker entities and special purpose vehicles to hold each investment or infrastructure project. SS&C has the technology and staff to properly account and report on these structures across several asset classes. However, each real asset has its own accounting and deal documentation requirements and we understand them, too.