The total equity market cap of the FTSE Nareit All REITs Index is over $1.1 trillion according to the National Association of Real Estate Investment Trusts, more than double the market’s $438 Billion value in 2007. This growth is due in part to the increasing variety of REIT specializations and countless fintech platforms that have democratized access to the market, increasing investor exposure to the market.
However, the rising popularity of real estate investing has had an unintended consequence: it has increased the correlation of the asset to equities and the overall market. This can be problematic for us, as we are generally trying to diversify away from equities when including a real estate allocation in a client portfolio.
This is why we prefer to allocate to non-publicly traded real estate funds over publicly traded REITs. Private placement real estate gives us access to institutionally managed real estate assets directly valued by leading firms without having to worry about external market forces having an impact on price and volatility. It’s a best-of-both-worlds solution for our investing needs.
Private Debt
In the wake of the financial crisis, many traditional lenders scaled back their business lending activity, paving the way for institutional funds and investors hungry for entry into the private lending markets to get a bigger piece of the pie.
And the market is expected to continue to grow, both in the United States and abroad. A 2017 report from the Alternative Investment Management Association said the global private credit market will break the $1 trillion threshold by 2020. AIMA CEO Jack Inglis called the private credit market “a permanent feature of the lending landscape.” Inglis noted that performance across the industry continues to be strong relative to other asset classes, which in turn has attracted more fundraising from investors.
Why would investors flock to such an obscure, illiquid type of investment? It comes down to returns. In a survey from BNY Mellon, 96 percent of respondents said private debt had performed at or better than their expectations—higher than for any other type of alternative investment.
According to Preqin, between June 2013 and June 2017 private debt funds recorded double-digit annualized returns. Direct lending strategies led the charge, returning 13.8 percent. Between the rising rate environment and equity’s volatile 2018 finale, the returns for an uncorrelated asset class like private debt are hard to argue with. Diversification, manager selection and an understanding of the illiquidity are critical—but for the right investor, it can be a valuable part of the portfolio.
The Right Alternative For The Right Investor
These investments are not for everyone. As Legg Mason points out, alternative investments come with quite diverse returns. Their liquidity can vary greatly as well.