Real assets are tangible, physical assets whose value is derived from their actual use such as apartments, bridges, power plants, and farms. They play a role in our daily lives and serve as key inputs to the financial well-being and growth of communities and countries around the world.
DIVERSIFIED SOURCES OF RETURN AND INCOME
Real asset investments are designed to offer diversified sources of return and/or income and hedge against inflation. When selecting underlying investments, real asset fund managers are typically focused on:
1. Identifying opportunities for growth and/or consistent revenue/income;
2. Maximizing the potential of the investment, which may include working with operators and management teams to implement changes that can require significant capital expenditures; and
3. Prioritizing downside protection through targeting investments with attractive pricing relative to replacement cost and the prudent use of leverage.
PRIMARY INVESTMENT CATEGORIES
Real asset fund managers typically specialize in a specific type of asset. They include, but are not limited to:
REAL ESTATE
Real estate is physical property such as land or buildings that is leased to tenants in order to generate regular cash flow. Examples include apartments, office spaces, warehouses, retail stores, and malls. Commercial real estate is the largest sub-category of real assets and consists of four main property types: multifamily/residential, office, industrial/warehouse, and retail.
Multifamily/Residential
Housing units: condominiums, apartment buildings, complexes
Office
Corporate/ Office space: large buildings, high-rises, corporate campuses
Industrial/Warehouse
Large buildings/structures: heavy manufacturing, light assembly, warehouses, research & development, or flex industrial (industrial + office)
Retail
Properties focused on the sale of goods and services: cafés, restaurants, banks, gyms, single or multi-tenanted (e.g., a shopping mall)
INFRASTRUCTURE
Infrastructure refers to the permanent facilities and installations needed for the functioning of a society or large- scale economic commerce. Examples of infrastructure include bridges, toll roads, airports, power plants, and cell towers as well as community structures such as hospitals, schools, and parks. We can broadly categorize infrastructure into economic and social infrastructure.
Economic Infrastructure
User pays directly for the services provided. Examples include energy, power, transportation, telecommunications, water, and waste services.
Social Infrastructure
Governments pay directly for the services; users pay indirectly via taxes. Examples include schools, hospitals, prisons, parks, monuments, and public transportation.
NATURAL RESOURCES
Natural resources are materials from the earth that support our daily lives and needs. Examples of natural resources include oil and gas investments, farmland, woodland, metals, and minerals.
Energy
Oil & Gas:
Exploration & Production
Agriculture
Farmland:
Crops
Timber
Woodlands/trees:
Extraction & Production
Metals & Mining
Elements: Gold/Silver/Copper
Minerals: Coal/Salt
REAL ESTATE AND INFRASTRUCTURE: STAGES OF DEVELOPMENT
When investing specifically in real estate or infrastructure funds, there are four types of investment strategies that a fund manager can deploy. These strategies are differentiated by the asset’s current stage of development and the level of work needed to get it to a position where it is generating consistent income or returns.
BENEFITS
KEY RISK CONSIDERATIONS
Real assets span multiple sub-categories and asset types. Key risk considerations may include, but are not limited to, the following:
Underlying Asset Risk: Due to the physical nature of real assets, investors may be exposed to a wider range of potential risks including macroeconomic, political, regulatory, environmental, or commodity risk. Investors should understand the risks associated with the underlying investments in a real asset fund before investing.
Liquidity: Real asset investments have a longer hold period than many other private market assets. Most real asset funds are structured with terms of at least 8 to 10 years, and it is common to see infrastructure funds with terms of up to 15 years.
Interest Rate Risk: Real assets can be sensitive to interest rates. An increase in interest rates may erode the relative attractiveness of the income generated and may lower the value of the underlying asset.
Credit Risk: Real asset investments may involve leasing to, or contracting with, non-investment grade counterparties, and there may be a greater risk of nonpayment of scheduled payments or default, which may affect the return to investors.
Transparency: Real asset funds may not offer the same level of transparency as traditional investments, which are required to provide frequent and full disclosures.
Fees: Real asset fund managers charge an annual management fee, typically 1–2% of assets under management. Fund managers also collect performance fees, known as carried interest, which traditionally represent 10–20% of any value appreciation or aggregated profits generated by the fund.
Leverage: Real asset funds may use some form of leverage, which offers the potential for higher returns, but also increases the downside risk.
Please contact your financial professional or a fund manager to learn more.
1. Source: Hamilton Lane. 1999 – Q3 2020.
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