Real assets embedded in listed companies are providing opportunities for alternative asset managers seeking to capitalise on the dislocation and volatility in listed markets.
HMC Capital’s managing director and group chief executive David Di Pilla said investors could take advantage of mispricing in the market with listed companies such as Crown Resorts, Ramsay Healthcare and Sigma Healthcare which had real assets, including real estate and infrastructure, embedded within.
“We are looking to capitalise on the dislocation and volatility in listed markets to access real assets at attractive valuations. By taking high conviction strategic stakes in listed entities we can access real asset opportunities that we think could outperform over the long term,’’ Di Pilla said at Investment Magazine’s Absolute Returns Conference in Sydney earlier in September.
Di Pilla said most infrastructure companies have “largely disappeared” from the ASX and now sat in industry super fund portfolios which were “probably never coming out”.
There was also “not much left” on government balance sheets. “There’s a shortage of assets and too much money chasing a limited opportunity set,’’ he said.
“As institutional capital flows continue to grow, we’ve got to be thinking more broadly and creatively to match capital with opportunities embedded within listed companies and conglomerates which can provide non correlated returns.”
Real asset opportunities
HMC Capital recently acquired a 15 per cent stake in Sigma Healthcare which it views as a strategic investment in an ‘asset rich’ business with attractive upside potential.
“It operates in an industry that has genuine barriers to entry. There are only three players of national scale regulated by the Federal government thus barriers to entry are high,’’ Di Pilla said.
“Secondly it operates critical infrastructure via national network of distribution facilities. Think about the community pharmacy… that has to be delivered under the CSO [community service obligation] within 24 hours securely refrigerated to their door.”
HMC Capital started buying into Sigma at 49 cents per share and took comfort in the fact that Sigma had 42 cents a share of asset backing following a $450 million capital investment into its distribution network.
“We’re creating asymmetrical risk on the upside because if you’ve got 42 cents of asset backing and you buy at 49 cents, the downside is limited but if we get the thesis right then the upside can be quite significant.”
“We’re now up 30 per cent in just over three months on our investment,’’ Di Pilla said.
Di Pilla is targeting investment opportunities which are not correlated to overall markets with real asset backing and without lots of goodwill on the balance sheet.
“We are looking for assets with infrastructure like characteristics which provide real pricing power and barriers to entry. In addition, we are looking for businesses with attractive re-investment opportunities which exposed to attractive structural tailwinds.”
On top of this was a focus on management and “executability”. “Can we work with management? Do we see them as being economically rational in their decision making?’’ he said.
“Getting a level of influence is key to this but working constructively to unlock that value is key. Obviously, you can’t invest around bad decisions and bad portfolio allocations.”
Speaking from Singapore at the conference, Di Pilla, said Australian real assets were attracting investors throughout Asia. “It’s Australia’s time to shine with high interest from pan Asian investors into the country,’’ he said.
Former Colonial First State Investments general manager Scott Tully, who left his role last month, said real assets are about those things not in a traditional portfolio of equities, bonds and cash.
“Investing in companies gets exposure to economic growth. Bonds are about putting your money aside for a while, and cash is a risk-free asset,’’ he said.
“What are you missing? You’re not getting exposure to some of the drivers of the economy – land, buildings where we work and shop and then you have the social structures that drive the economy – roads, airports etc.
“Real assets are about making sure you’re invested across the economy and have exposure to all those elements.”
Real assets are about those things that aren’t equities, bonds or cash.
He said the definition of real assets was “in the eye of the beholder” but one of the greatest challenges now was the mix between discount rates and inflation rates, how they interplayed and how that related to a portfolio.
“A regulated asset gives you a return profile and, in terms of the current scenario that investors face, what does your return profile look like if inflation is higher and economic growth is potentially lower,” Tully asked
“Is it protective of returns? You might have a return stream that grows with inflation or is the discount rate that’s being applied to those assets going to offset that?’’