‘Alternative investments are most suited for qualified, sophisticated investors’

With Alternative Investments playing an increasingly important role in investor portfolios, Damilola Ajayi, Executive Director and Chief Operating Officer at Vetiva Capital Management Limited speaks on Alternative Investments and how Nigerian investors can take advantage of emerging trends within the alternative investment space, writes Iheanyi Nwachukwu.

What are Alternative Investments?

Thank you for this opportunity. When we speak of investments in general, there are a number of conventional investment types that come to mind. For example, listed equities, treasury bills, commercial papers, bonds and so on. Now, the universe of investments that do not fall within these traditional investment types are commonly referred to as Alternative Investments.

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The Alternative Investment universe is quite broad as you can imagine and examples include well known investment types such as private equity or private debt investments, investment in commodities, infrastructure including real estate, investment in hedge funds, just to name a few, to less common investment assets such as Art, and other collectors’ items, or other tangible assets.

It is important to mention however, that when we speak of Alternative Investments, we are not speaking of an asset class as Alternative Investments cover or span a number of asset classes which include but definitely are not limited to those I have already mentioned. Even cryptocurrencies, some derivative products and also crowdfunding can fall within the category of investments known as Alternatives. Like traditional investments, alternative investment structures can be accessed either through direct investment in an asset or investing through pooled capital fund structures.

In practical terms, how do Alternative Investments differ from stocks and bonds, or the other traditional investment types you just mentioned?

There are a number of differences between traditional and alternative investments. Generally, traditional investments can be traded on a public exchange, whilst alternative investments are usually accessed through private markets. Secondly, Alternative investments usually have more complex structures compared to traditional investments. Also, the regulatory

framework around Alternative Investments is typically not as robust as those around traditional investments. As such, it can be argued that Alternative Investments have a higher risk profile than traditional investments. Case in point, the Nigerian SEC rules around investments in listed securities are very robust but with limited coverage of assets traded on private markets, understandably. Another difference is that Alternative Investments have typically longer-term horizons and as such tend to be not as liquid as traditional investment types which trade on relatively public markets.

You mentioned that alternative investments have a higher risk profile than traditional investment. Can you speak more about this?

There are a number of reasons, which I have already mentioned, why Alternative Investments are generally considered to have a higher risk profile. Firstly, they are more complex than traditional investments, secondly, they tend to have less regulatory scrutiny, which translates into a risk uptick. There’s also the issue of liquidity and typically longer investment horizon.

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We should note, however, that this has not deterred investors from adopting alternative investments. In fact, from the data I’ve seen, I would estimate the Global AUM for Alternative investments to be between 10 and 13 trillion dollars and some analysts believe that this could double in just a few years based on current trends.

As you know, all investments carry some level of risk and the important consideration for Alternative Investments in particular is to ensure a good understanding of the investment being undertaken and also a consideration of ways in which to mitigate arising risks. The risk profile of Alternative Investments also points to why they have enjoyed wider adoption amongst sophisticated investors.

These are investors who understand the nuances of investing, can understand complex transaction structures and can assess and evaluate transaction risk within the context of the expected returns and manage their exposure accordingly. For example, an invitation to invest in a Nollywood movie project can be called an alternative investment opportunity.

Assessing such an opportunity requires a level of savvy to evaluate the project purely from a risk-return perspective. Even if you consult field experts, a level of sophistication is required to understand the data or information that is being presented to you, you see what I mean. Lastly, we can’t speak about risk without a mention of potential returns. It is important to note that Alternative Investments also have the potential to deliver attractive returns. This is, however, as with all investments, not guaranteed.

What can you say about the level of Alternative Investment adoption in Nigeria?

That’s a great question. From where I sit, I think Investors are becoming increasingly aware of investment opportunities outside the usual traditional vehicles, for inclusion in their portfolios and we are seeing investors, especially high networth individuals (HNIs), seek information in this regard. I spoke earlier about the Global AUM data for Alternative Investments. I think the factors supporting this AUM growth globally are the same factors driving local adoption of Alternative Investments. What are some of these factors? First, we need to look at the increased activity we have seen generally in private markets, as investors search for superior returns in excess of what is traditionally available in public markets. A classic example is the flow of capital we saw from private equity and venture capital firms into tech startups in the past decade. We have also seen increased interest in collectibles, specifically Art, as an asset class for wealth management.

Even at the retail level, we saw at some point a proliferation of peer-to-peer investment platforms. Do you know this is also a form of alternative investment? Although, it is important to mention here that investors need to undergo proper due diligence before investing so as not to fall prey of pyramid schemes. Another factor that has driven the level of investor adoption of alternative investments is increased investor sophistication, which we touched on earlier.

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Many investors, especially experienced investors, now have the ability to understand more complex investment structures and manage risk better. Also, we have seen innovative asset management products which have eased access to a more diverse range of asset classes, also as a factor driving adoption. Arguably, the emergence of hedge funds was pivotal to the growth of the Alternative Investment space, globally speaking.

Can you briefly tell us about Vetiva?

Vetiva Capital Management Limited is a Pan-African investment banking firm. We offer a full bouquet of investment banking and financial advisory services to our clients through our subsidiaries, Vetiva Advisory Services Limited, Vetiva Securities Limited, Vetiva Fund Managers Limited, Vetiva Trustees Limited, and Griffin Finance Limited, which are registered and licensed to act as Issuing House, Broker Dealer, Fund and Portfolio Managers, Corporate Trustees, and Finance House respectively.
How does Vetiva approach the Alternative Investments space?

At Vetiva, the objective, in the context of your question, is simple, and that is to seek out opportunities which present the best risk-adjusted return profiles, whether traditional or alternative. We do this by ensuring that well tested, gold standard investment principles are upheld.

Our approach is to consider varied investor profiles and showcase investment opportunities which fit each unique profile and through which efficient portfolio diversification can be achieved.

Because alternative investments are typically more complex than traditional investments, we conduct thorough research and diligence of every opportunity before we allocate capital or recommend that our client do so. It’s important to note here that depending on the type of Alternative Investment, we may onboard the services of field experts and specialists. Also, as already hinted, these investments are most suited for qualified and sophisticated investors, who have the capacity to undertake their own personal research and evaluation of Alternative Investment opportunities.

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What would be your advice for investors looking to include Alternative Investments in their portfolios?

One of the most important principles every investor should practice in portfolio allocation is diversification. Ensure you run a diversified portfolio that reflects your risk appetite, your personal circumstances, your liquidity requirements and so on. Now, alternative investments theoretically would be expected to have a low correlation to the traditional investments, so there is a case for inclusion of well researched and curated opportunities in investor portfolios. The weightings to allocate would of course, differ from investor to investor. Also, it is important to seek technical advice in making investment decisions, especially in areas outside our expertise.