4 investment strategists break down where the rich are parking their money to beat inflation

view original post
  • With rampant inflation and the S&P 500 down 18% YTD, alternative investments are hotter than ever.
  • The options span from private equity to pre-IPO tech companies and more obscure assets like farmland.
  • Four investment strategy heads told Insider what’s hot with the rich and their advisors.

Recently, Alex Chaloff has noticed a habit with new clients. 

The co-head of investment strategies at Bernstein Private Wealth Management, Chaloff has seen new investors, even “non-sophisticated” ones, mark up their portfolio recommendations with a highlighter to mark everything they think is sensitive to inflation.

“That’s a conversation that didn’t really exist 12 months ago,” Chaloff told Insider.

Rampant inflation, a plunging stock market, and global turmoil have even high- net-worth individuals anxious. With bonds and stocks both crashing, alternative investments have become more appetizing.  

Alternative investments, from private equity to real estate, already account for $10.7 trillion in global assets under management as of the end of 2021, and are poised to reach $17 trillion by 2025, as estimated by BNY Mellon.

This means trading liquidity for the odds of higher returns, but the illiquidity premium is a price many are willing to pay. According to UBS’s most recent survey of family offices, 50% are currently or considering raising their allocation to illiquid investments.

The inability to track or sell assets can actually be a benefit, SVB Private’s chief investment officer Shannon Saccocia told Insider.

“Alternatives are attractive because it affords you time and space to wait for disruption to occur,” said Saccocia. “The private model, whether you’re talking about venture capital or distressed credit, that illiquidity protects investors from a behavioral response when they need to be patient.”

Private equity

Despite the headlines about down rounds and tech unicorns laying off employees, clients aren’t shying away from investing in pre-IPO growth technology companies, according to Daniel O’Donnell, global head of alternative investments at Citi Private Bank.

Clients can take advantage of valuation slumps for companies with sound fundamentals by investing in private equity, O’Donnell said. And though private valuations have taken a hit, it’s not as dramatic as with the public markets.

“It doesn’t mean there’s no value fluctuation, but I think there is some comfort with the valuation process and how they get monetized at the right time,” he said. “It takes a little bit of the volatility – or maybe the perceived volatility – out of the equation.”

Chaloff also said there are more opportunities to buy into private equity secondaries, and he expects it to continue for at least another two years.

“When there’s stress, suddenly every single institutional investor is revisiting their private market allocation and they’re looking to get rid of them where they can,” he said.

Private debt

As interest rates rise, private debt is seen as a safer investment, according to Nic Millikan, managing director and head of investment strategy for CAIS, an alternative investment platform for financial advisors.

In particular, direct lending to low- and middle-market companies has gained steam. With interest rate hikes, the balance of power has shifted from borrowers to lenders, he said.

“Lenders now have the upper hand in being able to put more protective covenants, interest ratios, coverage ratios, and things of that nature around the loans, which is positive investors within the space,” said Millikan.

The industries run the gamut, he said, but there is more interest in more obscure types of lending that are seen as recession -proof such as litigation finance – investing in a lawsuit in exchange for a share of the profit – and music royalties.

“People will listen to music whether or not there’s a pandemic or a recession,” he said. “That’s a really interesting way to get exposure to an asset class that pays a pretty consistent dividend based on the consumption patterns of consumers.”

Real estate 

Real estate is an effective hedge against inflation and interest rate hikes, though clients are showing some caution, favoring multifamily properties in major metropolitan areas, said Millikan

“It doesn’t have the sexy, double-digit returns that you get from developing and repositioning property, but at the same time that fits with the overall trend towards an aversion to taking on risk right now,” he said.

At Bernstein, Chaloff leans towards leases rather than property development, including corporate housing and industrial properties, to mitigate risk. 

“The easiest way to think about it as a hotel, where you can reset your rents literally every night,” he said. “We don’t want to overload on hotels at this point because the reopening is still going on, but we like to have some leases that are very short term.”

Creativity is needed when it comes to investing in this economic climate, Saccocia said. For instance, SVB Private has been investing in farmland for years. Until 2020 when US farmland prices increased by 7%, the investment generated low but consistent returns. Taking advantage of less crowded and less transparent markets such as farmland is a way to generate better yields, according to Saccocia.

“In this environment, you have to look for opportunities to capture return from inefficiency, and where you have opportunities to look for innovation,” she said.