SIMON BROWN: Exploring investment alternatives

I wrote last week about how I don’t invest in businesses that are not exchange traded, with the exception of businesses in which I am a majority or significant shareholder.

This week I want to write about alternative investments, which are basically anything but a traditional listed business.

Simple alternative investments are private credit, private equity, infrastructure and the like. Potentially, all offer decent returns, but how you invest in them matters a lot.

First, we now have actively managed certificates (AMCs) on the JSE and we have a private credit AMC. This takes a complex and hard-to-access investment and turns it into something that is easy to invest in. We have liquidity and skilled managers trading the private credit.

There are also, of course, several private funds that offer access to alternatives, and here it can get tricky.

Putting aside the quality of the assets, what matters is how you access the funds and the rules. Many will have lock-in periods ranging from as short as six months to as long as seven years or beyond. This is fine as long as you are 100% confident that you won’t need the funds until the lock-up expires. Investing only a small amount of your entire portfolio should manage this concern.

But the other issue is, how does the fund ensure liquidity generally?

Private equity, for example, needs to be able to sell the assets it has in order to pay out, and this is not always easy, especially with tight deadlines. Some will simply roll the asset into a new fund which pays for the assets, generating cash for the initial fund to pay out.

So if you are looking at these sorts of funds, you need to ask a lot about liquidity. Ask for examples from previous funds and try to find other investors who have exited successfully and chat to them. This is hard work, not foolproof and sometimes just not possible (especially finding previous investors). But this is the reality of investing away from traditional listed investments; the due diligence gets harder — much harder.

So here, again, my rule is that I want to invest in listed assets only, even with alternatives. Sure, the range being offered is small, but I like the extra regulations and liquidity I get from an exchange.

Lastly, back in the day the conversation about alternative assets was really about investing in wine or art and the like. This is usually a horrid idea, as we do not have the skills to do this. Now, maybe you come from a long line of stamp collectors and the required skills have been passed down to you. But most of us are actually buying from a salesperson who is not truly interested in our return in the years ahead; they’re interested in their commission today.

So I stay even further away from these niche alternatives, especially as the risk is always that I just drink the wine.