AIBC 2024 Introductory Series: The Essentials of Alternative Investments
Foreword
AIBC Global Research Team continues to provide unparalleled student development opportunities in 2024
It is with great pleasure that we welcome you to the Asia Investment and Banking Conference (AIBC) 2024, where this year's theme, "Redefining Boundaries," encapsulates our commitment to shaping the future of finance In line with this vision, we proudly present the #AIBCResearch series a pioneering endeavour to merge the academic pursuit with industry acumen crafted by our eminent student analysts.
This curated collection of insightful articles is a catalyst for change, challenging conventional wisdom and encouraging a re-examination of the financial sector's perceived limits. AIBC's dedication to student development, strategic talent discovery, and meaningful industry connections is exemplified through our research initiative. These components are integral to our foundational goal of equipping emerging finance professionals with the tools to transcend traditional barriers
We invite you to engage fully with this series, allowing the insights within to broaden your perspectives and enhance your capacity for innovative thinking May your journey through the #AIBCResearch series inspire you to redefine your own boundaries and contribute to the ever-evolving narrative of the finance industry.
The Introductory Series
The Introductory Series is a practical collection aimed at providing a clear view of the foundational elements of finance It consists of eight research booklets, each one concentrating on a key area within the finance sector, topics which will be part of the AIBC 2024 conference discussions.
These booklets are created to cut through the complexities of finance, offering clarity to readers from all backgrounds. Our objective is to equip you with a basic yet comprehensive understanding of each financial domain, underlining its specific functions, the challenges it encounters, and the potential it holds within the global financial framework
AIBC 2024 Themes
Overviews and insight Follow the 8 themes unfolding throughout the conference
Investments in assets outside of stocks, bonds, and cash, including real estate, commodities, and collectables.
Private investment funds employ various strategies to earn active returns for their investors, often using leverage and derivatives.
The process of developing, operating, maintaining, and selling assets to maximise investor returns.
Banking services offered to high-networth individuals, providing personalised financial advice and solutions. The use of mathematical models and algorithms to identify trading opportunities and manage investments automatically.
Financial services dealing with the creation of capital for other companies, governments, or other entities through underwriting or acting as the client's agent in the issuance of securities.
Investment in private companies or buyouts of public companies, aiming to restructure or improve their operations and profitability before selling them for a profit.
The buying and selling of securities, commodities, and other financial instruments in financial markets, through either facilitating transactions for clients or trading on their own firm’s behalf.
What are Alternative Investments?
Today, alternative investments or assets refer to any asset class that goes beyond traditional long-only investments, such as stocks and bonds. Alternative investments provide a valuable opportunity for investors to diversify their portfolios and achieve return profiles that may differ from traditional investments in order to meet their long-term investment objectives amidst market volatility
Generally, alternative investments can be characterised by factors including: low correlation to traditional investments, illiquidity of assets, higher minimum investment requirements and longer lock-up periods.
For large institutional investors with a higher tolerance for illiquidity, alternative investments could include a combination of hedge funds, private equity, private credit, and real estate For individual investors, the alternative investment universe may include all these and even cryptocurrencies, art and collectables
We will be taking a deep dive into the key forms of Alternative Investments:
Private Equity (PE)
Venture Capital (VC)
Real Assets (Real Estate)
Hedge Funds
Private Credit
Alternative Investments Breakdown
Private Equity
Private equity (PE) investments involve taking an ownership position in privately held companies, ranging from early-stage growth companies to large enterprises across every industry and geography The primary goal of PE investment funds is to purchase an asset or company and apply a value creation or growth playbook by building a high-calibre management team, engaging in long-term business transformation, and creating synergies across portfolio companies.
At the end of the investment cycle, PE funds exit the investment, either by selling it (trade sales, buyouts) or through an initial public offering (IPO). Beyond recouping the initial investment, PE funds aim to realise additional returns from operational investments and changes implemented by management to increase valuation of the business over time In addition, investors seek a higher return for making illiquid investments than they might achieve holding liquid public equities (also known as illiquidity risk premium). This can be attributed to the longer lock-up period of investor capital in PE funds, ranging from 3 years to more than a decade, which means investors are unable to withdraw any funds during this period. Historically, return generation in private equity has been attractive (See Figure 1), derived from earnings growth, and multiple expansion (i e EV/EBITDA) by exiting at opportune moments and through the leverage effect
Alternative Investments Breakdown
Venture Capital
Venture capital (VC), a widely recognised type of private equity, consists of financing provided to startup companies and small businesses with the potential for substantial and rapid growth, in exchange for equity. Unlike PE firms, VC firms often take a minority interest (50% ownership or less) when investing in companies If a portfolio company is successfully acquired or enters the public market via an IPO, the VC firm earns a profit and distributes returns to the limited partners (LP) that invested in its fund The firm could also sell its shares to another investor on a secondary market VC investments often entail higher risks due to a lack of track record of profitability, but may offer a higher return on investment (ROI) if successful
Real Assets (Real Estate)
Real assets are investments that involve direct ownership of non-financial assets, including infrastructure and real estate. Over the years, real estate has evolved into a multi-faceted asset class that includes publicly-listed and private real estate investment trusts (REITs) or private transactions, using equity or debt Real estate sectors are broadly summarised by the commercial (office, retail, industrial & hospitality) and residential categories. In terms of ROI, parallels can be drawn between real estate and bonds/equities - property investors receive cash flow from tenants paying rent (similar to interest payments) and benefit from capital appreciation when the value of the asset increases.
Alternative Investments Breakdown
Hedge Funds
Hedge funds are actively managed, pooled investment vehicles that use a range of nontraditional strategies (e.g., global macro and longshort strategies) to maximize the overall return potential and diversification of a portfolio. Hedge funds play a risk management function by 'hedging' against overall risk-taking on asset positions that offset existing sources of risk
Hedge fund strategies can include:
1. Long-short equities
Taking long positions in stocks deemed as undervalued and short positions in stocks considered overvalued. Security selection decisions may encompass industry long-short (long technology, short natural resources), or regional long-short (long Latin America, short Eastern Europe)
2. Event-driven
ed mispricing of securities by such as corporate mergers & ptcies, and spin-offs. This category ken down into special situations, vist and merger arbitrage strategies
3. Global Macro
Participating in all major markets and utilising a broad range of financial instruments - equities, bonds, futures, currencies, commodities - to capitalise on broad market swings based on appraisals of political or economic conditions These events include interest rate fluctuations, currency exchange rates, inflation and unemployment
4. Credit
Investing in debt instruments, with the aim of profiting from inefficiencies in lending, taking long or short positions in the price of the derivative. These are further broken down into fixed-income credit, mortgagebacked, and asset-backed, to name a few
5. Relative Value
Focusing on relationships between related securities and temporary differences in their prices which offer an arbitrage opportunity (e g two companies in the same industry, yield spread between Treasury and corporate bonds, price differentials within a firm’s capital structure).
Alternative Investments Breakdown
Private credit refers to originated debt instruments without an intermediary, such as a bank, to connect the borrower directly with the private (non-bank) lender. Privately originated loans are typically illiquid and held to maturity. Private credit provides a way for businesses to access credit and growth capital, when traditional sources of capital are not available Investors can meet their portfolio diversification goals within the private capital markets, as the asset class covers a wide range of instruments, including corporate lending, mortgages, commercial real estate, etc (See Figure 2)
Spectrum of Public and Private Credit
Today, direct lenders hold a critical role in the market economy by providing capital to middle-market companies, often considered the heartbeat of most economies Traditional banks have reduced their amount of loan issuance to these companies off the back of a tighter regulatory landscape post Global Financial Crisis
Figure 2: Types of credit investments (categorised by public or private credit)
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