Real Assets: Why the World's Best Investors Are Increasingly Looking Beyond the Stock Market

A shift is underway in how the world's largest and smartest institutional investors deploy their capital. For well over two decades, pension funds, sovereign wealth funds, insurance companies and university endowments have been steadily increasing their allocation to what the financial world calls 'alternative assets': infrastructure, real estate, renewable energy, private equity and private credit. Assets that are not traded on an exchange, but acquired in direct transactions and held for long periods.

That shift is not a passing fashion. It is a structural response to a fundamental investment problem: how do you protect capital against inflation over decades, while generating a return that exceeds the obligations owed to pensioners, policyholders or beneficiaries?

Why real assets are so attractive

Real assets — infrastructure such as roads, ports, airports and energy networks; real estate; farmland; forests and commodities — have a property that financial assets such as equities and bonds lack: their value is directly linked to the physical economy. When prices rise, so do the revenues that real assets generate. A toll road that receives more as construction costs rise because its tariffs are indexed to inflation. An energy network that charges higher tariffs because regulation allows it to pass inflation through. A residential building whose rental income grows along with the cost of living.

That inflation protection is fundamentally different from that of gold or commodities. Gold generates no cash flow. A pipeline does. A wind farm does. A hospital building does. Real assets combine inflation protection with current income, and that combination is precisely what long-term investors need in order to meet their obligations without eroding their capital.

Liquidity as the price of better returns

There is a price for the attractive properties of real assets: liquidity. An investor in a toll road or a wind farm cannot sell that stake on a Tuesday when markets fall. Funds that invest in real assets typically have terms of ten to fifteen years, over which the capital is locked up. Exiting early is rarely possible, and where it is, only at a considerable discount.

For institutional investors with long-dated obligations — a pension fund that must make payments thirty years from now, an insurer with long-dated policies — that liquidity constraint is not a problem but an advantage. They need the capital committed for the long term in any case. By harvesting the illiquidity premium, they achieve structurally higher returns than they would by investing exclusively in listed assets. Over the past two decades, the average long-term investor in infrastructure has achieved consistent excess returns relative to comparable listed asset classes.

The rise of the large alternative managers

The growth of institutional interest in real assets has created a category of companies that far exceeds traditional asset managers in scale and profitability: the large alternative managers. These companies collect capital from institutional investors, pool it in funds with terms of ten to fifteen years or longer, and invest it in real assets around the world. Their revenues consist of recurring management fees on total assets under management, regardless of market performance, supplemented by performance fees when funds are successfully wound up.

That business model is exceptionally attractive. Once an alternative manager has raised capital and committed it to a fund, that fund generates management fees for years without further effort. New funds are stacked on top of existing funds, so total assets under management grow structurally. And because institutional investors continue to expand their allocations to alternative assets, demand for capacity at the best managers exceeds supply. That creates a rare combination of recurring, high-margin revenue with structural growth.

What this means for the private investor in Curaçao

Direct access to institutional alternative funds is out of reach for most private investors. Minimum commitments typically run into tens of millions of dollars, and the funds are open exclusively to qualified institutional parties. But there is an indirect route: investing in the listed companies that manage these funds. An investor who holds shares in a large alternative manager participates in the recurring management fees, the performance fees and the growth strategy of that company, without needing direct access to the underlying funds.

It is an approach that has gained considerable popularity in recent years among professional investors who want to capture the structural growth of alternative asset management without the illiquidity problems of direct fund investments. For those interested in how we use this class of investments in the portfolios we manage, we are happy to have a conversation.

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Disclaimer

This article is published by Beaver Funds for general informational and educational purposes only. It reflects the personal views of the author at the time of writing and does not constitute investment advice, a recommendation, an offer, or a solicitation to buy or sell any security or financial instrument. References to specific companies are illustrative and should not be interpreted as buy or sell recommendations. Investing involves risk, including the possible loss of principal. Past performance is not a reliable indicator of future results. Readers should consult a qualified financial advisor before making any investment decision based on their personal circumstances. Beaver Funds is supervised by the Centrale Bank van Curaçao en Sint Maarten (CBCS).