The financial crisis of 2008 forced many investors to re-visit the way they invest, and how to find returns in the market. Traditional ways of earning returns and income were thrown out of the window. Too many markets were seen to correlate. At the same time financing for businesses was going through a revolution of its own, as the role of banks in the economy changed.
Now there is more of a focus on real assets, and new asset classes are emerging to meet the demand for yield. Evidence for this trend comes from equity market volumes, which are still lower than 2007, while real wages remain low and government debt stays high.
Other traditional sources of diversification or returns, like commodities, are no longer able to deliver historical performance.
New investment landscape
The new investment landscape is, however, throwing up new opportunities in the form of real asset strategies which take a more traditional approach to generating returns, for example by replacing banks as sources of credit finance.
Major macro-economic factors are looming in the UK, for instance in the energy sector, where real assets funds can make a difference. As older projects are decommissioned, future demand for power needs to be met by renewables. Who will finance this demand?
Investment in onshore electricity and transmission networks in the UK increased by more than 20% between 2010 and 2014, but a further £34bn ($48.2bn, €43.8bn) is needed, the government believes.
Much needed domestic and overseas investment is being encouraged by guaranteed price tags, for example at the Hinkley Point nuclear project in Somerset. Such projects can produce guaranteed, government-backed income streams outside the bond market. An estimated £6.3bn was invested in biomass and bioenergy projects alone in 2010-13, with a further £5-£6bn per year to be invested between now and 2020, according to the UK Department of Energy and Climate Change.
Energy cost impact
UK farming and food processing is also grappling with higher energy prices, with no material fall in the cost of UK electricity, even though the oil price has plunged. This makes for a less efficient farming sector, one that consumed over £1.4bn in energy in 2012.
Cheaper electricity for farmers could come from alternative energy, but this will require investment, even at the individual farm level.
The UK government is keen to help farmers to find independent power solutions outside the UK grid. Some of this could be met via biomass, allowing farms to also avoid the cost of increasingly expensive landfill (which has risen from £56 per tonne in 2011 to £80 per tonne in 2014).
To pay for new energy infrastructure like solar panels or biomass plants, farmers might have turned to the banks, but lending to agriculture and food related industries is slower than pre 2008 as overall business investment in the UK has plunged.
Farming and food processing infrastructure is ageing, and the UK is falling down the global farming efficiency tables. Farmers require credit, and new lending in this market is increasingly becoming the province of asset managers and specialist finance arrangers.
Loan strategies are favoured by investors for their consistent, positive returns coupled with lower volatility than market based funds. They also have the advantage of lower correlation to public markets.
The increase in the number of loan funds in the market has been marked – Preqin has estimated $29bn in total AUM for this asset class in 2014, and this number is set to increase.
Loan funds require portfolio management teams who are experienced in commercial lending, frequently coming from the loan desks of major banks. They employ highly transparent strategies that are easy for investors to understand, and are easily scalable, particularly as the gap in financing to SMEs has widened enormously since 2008. This can produce an income stream more akin to bonds, but without the market vagaries attached to bond prices.
UK farmers in search of infrastructure finance benefit from the fact that British farmland enjoys some of the highest land prices in the world for agricultural land, which can serve as easily priced collateral.
In addition to this, energy projects in the sector receive the enthusiastic support of the government, in the form of funding for environmental schemes, for example via the £3.5bn Rural Development Programme for England (RDPE), which runs until 2020.
While providing these sectors with the capability to reform themselves and modernise, loan funds are also delivering the direct to market approach for participants who desire exposure to this sector coupled with a proper evaluation of its risk-return components.
