In the last month and a half, the world’s capital markets show an impressive recovery after a difficult six months that led some of the world’s leading indices to enter a bear market, losing tens of percent of their values. Such a period raises the public’s need for investments that are not directly affected by the capital markets, that is, in an alternative investment channel to the stock market.
The world of private and alternative investments has been characterized by significant growth in the last decade. According to the Preqin website, which tracks alternative investments around the world, it currently manages assets in the amount of more than 11 trillion dollars, and the predictions are that by 2025 the amount of investment in it will reach about 17 trillion dollars.
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Key segments for such investments are through debt funds (the worlds of consumer credit and credit backed by real estate) alongside investments in real estate and infrastructure and private equity funds, venture capital and hedging (although the latter also depend on what happens in the capital markets, so they are not a complete alternative to them).
In Israel, the leading debt funds are real estate-backed funds, mainly in view of the increase in interest rates worldwide that made them attractive during this period (since the repayments are increasing to such an extent that there are funds that grant credit only at variable interest rates in order to benefit from the increase in interest rates), while another segment that is growing in popularity is investing in platforms Providing consumer credit to the public in the US by way of Peer to Peer (or in short, P2P). However, it should be noted that investments of this type are not without the risk of default events on the part of borrowers, especially when interest rates rise and companies in which funds have been invested may collapse, and especially in P2P loans that are also given without collateral.
From a Globes inspection of 11 debt funds managed by leading entities in the capital market and managing a total of more than 11 billion dollars (mainly funds of institutional entities and investors) they recorded even in the difficult period of January-June 2022 a positive return that averaged 2%- 3%
This is in a period of time when the index of the leading companies on Wall Street, the S&P 500, recorded its worst first half of a year since 1970 when it fell by more than 20% from January, when the bond markets, which are seen as more solid and stable than the stock markets, also recorded sharp declines in the same period.
“After years of celebrations in the capital market, this year we can see the advantages of real alternative assets that bring a positive return,” explains Amir Golan, manager of the CCF consumer credit fund of the IBI investment house. This is the largest and oldest debt fund in Israel that specializes in consumer credit through the purchase of loans from P2P platforms in the US and has approximately $720 million in assets.
Amir Golan / Photo: Ilan Bashor
“People got burned this year in the capital markets and I saw losses that I haven’t seen in 12 years. Even people who held solid bonds, meaning that they don’t want to gain or lose much, reached minus 15%, and this is where you see the advantage of an alternative investment.”
We point out that unlike the pension and provident funds whose investment composition is known, the alternative funds differ radically in their level of leverage, in the risk they take as well as in the nature of the loans. However, the positive yield trend stands out for most of them, especially in relation to the stock market.
This stability is also reflected in good years in the capital market. For example, in 2021, the tested funds obtained a return ranging from 6.5% to about 12%, when the Nasdaq made a return of 21.4% that year, while TA 35 obtained a return of 32%. For that return, the managing companies charge a success fee (participation in the fund’s profits) that ranges around 10%, in addition to a management fee that ranges from 1% to 1.5%.
“The yield depends on the type of activity of the fund,” explains Gabi Mosheiv, CEO of Harel Alternative Finance. “In credit, the return is measured according to the contractual interest rate of the loan and whether it is linked to inflation. In real estate investments, the return is affected by the current flow from the property, the cost of debt, and more.
Gabi Mosheiv, CEO and founder of Harel Alternative Finance / Photo: Public Relations – Mia Karmi Dror
“Forecasts for rent increases can have an impact when segments such as hotels have a higher sensitivity. On the other hand, segments of health, life sciences, housing and logistics complexes are more defensive and have more rigid demands. In private equity funds, the return is based on the need for additional fundraising rounds, issuance or Existence of an external valuation that is done once in a while and accordingly the valuation is carried out.”
It takes time to discover negative returns
Along with the benefits that are manifested mainly when the tradable markets (shares or tradable bonds) go down, there are also risks in the alternative market. Unlike the capital markets, the return on alternative investments is not updated on a daily basis, so even negative returns may only become apparent after a long period of time. or in yielding real estate, it is a return known in advance according to the loan agreements or the lease contract of the real estate.
The liquidity is also different. “Unlike the capital market, where the investment is liquid and can usually be realized immediately, when investing in funds one must take into account that there is a blocking period,” explains Erez Brit, CEO of Tandem Capital, which manages the Golden Bridge Fund.
According to Ziv Sapir, director of the Vulcano and Comerit funds at IBI, this also has an advantage. “Today’s liquidity is higher than in the past and most of our funds have a lock-in for a year from which you can exit within 90 days at the end of this period. Those three months allow a customer who wanted to exit but sees a correction in the market to withdraw and not withdraw the investment.”
Ziv Sapir / Photo: Ilan Bashor
“The non-tradable world reduces impulsive mistakes resulting from pressure. In investments, the best medicine is time, but in the tradable world, pressure affects judgment. On the other hand, the standard deviations of the non-tradable world are much smaller. When you look at investments for 7-10 years and see that they did not Even one negative quarter, then you realize that maybe there is a non-risky product that can also bring a good excess return. In Israel, they are starting with this little by little and many, many investors are joining this market,” Sapir says.
10 years ago the alternative market in Israel was almost non-existent and also in the world it was less developed than today. “The market is growing because it has the ability to generate a higher return at a lower risk, and over time. This is very important for an investment portfolio, even for an individual and certainly for an institutional body that looks at the long term. And perhaps most importantly, according to all the studies, the correlation is very low with the stock market. So the investor You also get diversification, lower standard deviation and get a higher return. It’s a win-win-win,” explains Golan.
“If 35 years ago in the US only 5% of the portfolio was invested in the alternative sector, today the allocation is already over 20%. There are entities that even reach 30% of the pension portfolio. In the worlds of family offices, they tend to be much more aggressive, up to 50% in the portfolio mix,” says Mosheiv.
What you need to know when entering the field
The differences between the alternative investments and tradable investments, and also between the non-tradable funds and themselves, are many.
“The world of alternative investments is relatively complex, it requires extensive knowledge, a thorough understanding of the rules of regulation and the tax laws of the country in which you invest,” Mosheiv explains. “Accordingly, these are transactions that have an element of risk, but since they may sound tempting, the recommendation is to invest through a regulated entity, which also invests significant amounts from its own pocket (identity of interests), which has a track record (past performance) even in challenging market conditions.”
Brit adds that in a debt fund the most important thing is to know the parameters of the risk. “Does the fund issue senior debt? Is the fund leveraged? What is the ratio between the value of the assets and the value of the loans? Where are the assets pledged against these loans located? For example, we are active mainly in New York, there is of course a difference between collateral for a property in New York and collateral for a property located elsewhere In the US,” he says.
“The USA is the fastest growing and most regulated market”
Most of the alternative investments of local entities are directed to the American market. “This is the most regulated, sophisticated, largest and fastest growing market. On top of that, since 70% of GDP comes from consumption, it is the consumer who leads the economy,” Golan points out.
Sapir adds that if someone wants to invest a billion dollars, he will still turn to the American economy and gives as an example the subject of interest, where all eyes are on the Fed’s decisions.
However, some argue that even in Israel the alternative world is interesting. “The local market embodies a very large potential, but compared to the world, it is not diverse enough,” says Mosheiv. “Harel, which already invests in the non-tradable worlds in Israel, will continue to expand its investments in Israel and is looking into the possibility of launching a local investment fund. In addition, we recognize potential in terms of the shekel return against the dollar because hedging costs have risen, which gives an advantage to establishing a shekel fund in Israel.”