ADAM BULKIN: Alternative assets a rich hunting ground for effect and sustainability

Asset managers keen to maximise the social effect of their investing activities are looking towards the plentiful opportunities in the alternative asset universe. However, the local asset management industry has a long way to go to catch up with the US and other developed markets insofar as allocating assets to alternatives vs traditional assets is concerned.

Local pension funds’ exposure to alternatives is restricted by law, while large pension funds in the US often allocate as much as 30% of their capital to this class. However, this restriction is expected to change in SA in the coming months, opening the door for greater investment in alternatives.

It is unlikely that you will find any local institutional or pension fund with a greater than 10% allocation to alternatives in SA now. However, we are seeing institutional and pension fund allocators migrating to private market opportunities in the debt, equity and property segments. In the search for uncorrelated sources of return, a review of the allowance for investment in alternative assets such as private markets should now be considered more seriously.

Multimanagers rely on fund managers with specialist experience and expertise in alternative investment management when seeking to build exposure to this asset class. Once they make an active decision to increase a fund’s exposure to alternatives, they want each of the selected underlying managers they appoint to be a specialist and focused manager that caters for the niche they operate in. Alternatives comprise a broad set of financial instruments and opportunities, from hedge funds and their different subcomponents to private markets, which in turn include private debt, private equity, private property and unlisted infrastructure.

Environmental, social & governance (ESG) factors are an important aspect of all investment decisions. All managers should consider the ESG risks attached to every investment they make, whether in the alternative or traditional universe. This ensures that an appropriate price for the risk and return on offer from each opportunity is identified and allows fund managers to get an early start to engaging with investee companies on how to improve their management of ESG risks. With private markets investments multimanagers are able not only to incorporate ESG risks into their investment decisions but to ensure positive and effective outcomes on the physical and social environment.  

Social effect

Asset managers that wish to maximise the environmental and social effect of investing will find a range of opportunities in private markets. Before choosing a private market fund manager we want evidence that the manager will invest in assets that will have a positive effect on the environment and society, as well as assurances that they can measure and report on those effects. This is done by requiring the managers with which we invest to report on the alignment of their investing activities with the UN sustainable development goals (SDGs).

A consideration when choosing a private market fund manager is the potential social effect of the model used to finance the transaction, remaining wary of private equity managers that favour traditional leveraged buyout models, where value is derived by using leverage (debt) and driving bottom line improvement through job losses and pay cuts. We need the manager to drive value through top-line growth, by increasing employment and by adding long-term economic and social benefit through the goods and services they produce.

The growing pressure on infrastructure in SA has created numerous opportunities for asset managers to make environmental and social improvements for the country and its citizens. However, in considering ESG broadly, in both traditional and alternative investments, the SA landscape requires a nuanced stance towards carbon emissions.  

Carbon reduction is a major focus among European countries, and while it is extremely important in the SA context too, there are other aspects that one has to balance against this goal. For example, before closing mines or denying them capital, we must weigh up the negative social effect in terms of employment against the provision for infrastructure and energy countrywide. We need to factor in the improvements we can help to drive in public and private companies in managing ESG risks and improving their ESG credentials, rather than simply refusing to invest in companies that are considered to carry great ESG risk.  

One of the unintended consequences of ongoing efforts to improve ESG scorecards has been for public, listed companies to sell their “dirty” assets to private, unlisted firms, which then continue their operations without public scrutiny. We believe this is why asset managers must consider the intended and unintended consequences of denying capital, or negatively screening investments, based on ESG factors.

• Bulkin is head of manager research at Sanlam Investments Multi-Manager.