In this Viewpoint, we discuss the unique real asset and private equity investing strategy employed by Barings Alternative Investments.
BAI’S UNIQUE STRATEGY FOR REAL ASSET & PRIVATE EQUITY INVESTING
Competition on the rise
Allocations to real assets, private equity and infrastructure form an integral part of many portfolio allocation strategies as investors look for compelling capital returns, as well as predictable current yield.
Today, record levels of capital are being committed, with combined dry powder across private equity and infrastructure totaling $875 billion over the first seven months of 2017, up 18% from the end of last year.1 While this has provided managers with ample firepower to deploy toward deals, the rising competition has meant that yields have compressed for core infrastructure and the prospect of capital upside or price appreciation has diminished. For the buyout universe, the competition-driven increase in purchase price multiples and leverage is likely to make the J-curve deeper and capital returns more back-ended. As a result, investors are confronted by a more challenging environment in their search for opportunities offering mid-teen IRRs with current yield.
Real assets, real differentiation
By focusing on real assets and asset-based investments in an area that sits between more traditional definitions of infrastructure and private equity, we aim to combine the attractive current cash flow of infrastructure with the long-term capital uplift offered by private equity. In doing so, the BAI Direct Investments platform targets a differentiated shape and quality of return for investors.
The shape of the return profile exhibits the risk-adjusted qualities associated with predictable current cash flow and rises in line with the potential for capital gains from private equity investing and enterprise development. Enterprise development is where scaling real assets and bringing in operational capabilities can transform the value paradigm for an asset that trades on a book value basis into a going concern that can be sold for a multiple of earnings.
- Source: Preqin. As of August 31, 2017.