Are esoteric asset classes the new hedges?

When institutional investors say they’re looking for uncorrelated sources of return, that often means adding a sleeve of trend followers or quantitative strategies to their hedge fund portfolio, but that can change. More funds are coming to market to pursue investment opportunities off the beaten track, such as whiskey or classic cars, while other niches such as royalties and intellectual property investment are beginning to mature.

An indication of how quickly these markets are maturing came on March 18, when Swiss investment firm Partners Group AG announced it would add royalty investments as the fifth pillar of its private markets platform. According to a strong statement, it will offer bespoke and evergreen structures to invest in intellectual property assets in the pharmaceutical and entertainment industries, in addition to emerging areas, including rights to revenues arising from the energy transition. , sports. and brands. The royalty investment team’s offerings are intended to fit within existing institutional mandates, creating an evergreen vehicle for high net worth investors.

Partners Group estimated that royalties could be a $1 trillion market, with the potential for rapid growth.

The decision by Partners follows what Matthew Farrar, managing partner and head of Aon Advantage Funds LLC, is seeing. “We have a significant transition happening where intangible assets — like intellectual property — make up almost 90% of the S&P 500,” he says. “These are assets that are hard to understand, hard to value, hard to invest in. You have to build a process that is able to understand and really distinguish good IP from bad IP , or at least IP that is vulnerable to market forces.”

Farrar says Aon’s platform tracks approximately 150 million patents across all sectors of the economy, looking at factors such as litigation risk, licensing opportunities, country risk, how often a company files for new patents and avenues for future development. . “Essentially, we’re asking whether this is a good company to invest in from an IP perspective, and that’s not always an easy question to answer — especially from a private markets perspective, where it can be more hard to get information. ” he says.

However, adds Farrar, institutional investors are interested in these investments because they can provide unique exposure to the growth of a company or a sector theme.

You can enjoy it

While a significant portion of companies are focused on intangible assets, there is still a growing market for investment funds that engage in tangible assets. In late January, Cordillera Investment Partners closed its $62 million Whiskey Opportunities Fund, focused on acquiring and aging whiskey barrels as institutional assets.

The idea for a dedicated fund arose from several investments the firm made in its second flagship fund, starting in 2019. According to Gus Araya, co-founder and co-managing partner of Cordillera Investment Partners, the firm began identifying opportunities as an offering -Dynamics and demand in the whiskey industry created dislocations in prices: Market prices for old whiskey are significantly higher than for new whiskey, as consumers are willing to pay for the premium product. According to industry analysts, the volume of sales of super premium whiskey has increased more than 100% in the last five years.

Bourbon Boom Revenues in bourbon and Tennessee whiskey grew 249% from 2003 to 2021, according to Distilled Spirits’ American Whiskey Report 2022.

“Many of the craft brands that have emerged over the last 10 years don’t have the scale or the distillery to sit on the product as it ages,” says Araya. “So that’s where investors like Cordillera can come in and use our balance sheet to sit in the middle between the wholesale distillers that actually create the whiskey and the craft brands that will sell it and sell it years later.”

Araya says that for investors, the fund will operate as a specialized private equity fund. “These are the kinds of opportunities you have to be early on and invest a lot of time up front to understand,” he explains. “They’re hard to track and they’re hard to sign.”

Cordillera as a firm, however, focuses on such opportunities. The fund also invests in other areas, such as marine rights and data. Araya says the company’s investors typically seek exposure that will diversify their portfolios and is not tied to any broad market trends.

Start your engines

Another firm, Drift Capital LLC, is taking a similar approach to investing in classic and ultra-premium cars. In September 2023, Drift launched its debut closed-end classic car fund, which invests in collectible and luxury cars. Drift is building the portfolio using a proprietary benchmark – the Drift Automotive Returns Composite.

“We are focused on cars that will be marketed and valued in the million dollar range,” explains Eden Cooper, founder of Drift. “This is a market that didn’t even really exist 20 years ago, but it speaks to how the valuations of these cars have increased over time.”

The composite is designed to track the value of these cars over time, including collector demand and liquidity. Cooper says the benchmark helps the investment team ensure the cars in the portfolio are more likely to hold lasting value among collectors and investors. The composition suggests an approximate investment performance of 13% per year on average for the diversified fund, says Cooper. In the future, Drift may consider making funds or manufacturer-specific funds that include cars with newer technologies, such as electric vehicles.

Drift targets its offering to institutions and high net worth investors, which differentiates it from a small group of fractional equity funds that are open to a wide variety of investors. Cooper says that while he sees the benefits of fractional ownership — it increases interest in the collective car market, if nothing else — it’s harder for investors who want to write bigger tickets to get into those markets.

Sharing Is Careful

If the art world is any indication, fractional ownership markets can also end up, well, very fragmented. The art market is no stranger to the involvement of investment funds in the acquisition of works, and in 2017, a firm called Masterworks LLC made headlines with its partial investment offering. Since then, however, pricing structures and investment interest have evolved, leading to several new entrants, including recent newcomer InversionArt Inc. and aShareX Inc.

InversionArt and aShareX have teamed up to offer a new take on fractional ownership at what they say is a lower total cost than that offered by firms like Masterworks. InversionArt and aShareX are launching an auction of works of contemporary artists which will allow a combination of fractional and total ownership using aShareX’s proprietary auction platform.

The bid is designed to take into account the total cost of the artist, not just the value of the piece. Artists provide a three-year summary of studio income and expenses, as well as documentation supporting their five most recent commercial, commission and licensing agreements to InversionArt when they are part of the auction. The partnership with aShareX also includes a 10% resale royalty for the sale of selected artwork.

Alan Snyder, founder and CEO of aShareX, says the platform grew out of his previous work creating marketplaces for other financial products, including insurance, credit cards and art lending — a type of direct lending based on the value of a portfolio of artworks.

“Our approach is designed to do more than provide an arbitrary part value; is intended to support price discovery and offer true market-based pricing, allowing fractional owners to go head-to-head with traditional buyers,” says Snyder, adding that the lower total cost has attracted early attention from institutions and high net worth investors who did not find a match with other art funds.

“This is a market that has a lot of interest, and we’re providing a way to get into it,” Snyder says. “From the institutions, we are seeing interest in both the technology group that runs the auctions and the market itself. We think it’s a long-term opportunity and a market that will continue to develop.”

Tags: Alan Snyder , Aon Advantage Funds LLC , aShareX Inc. , Cordillera Investment Partners , Drift Capital LLC , Eden Cooper , Gus Araya , intellectual property , InversionArt Inc. , Matthew Farrar , Partners Group AG , Whiskey Opportunities Fund

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