Alternative assets cover a wide range of investment opportunities such those listed below, as well as cars, jewellery, art, cryptocurrencies and unquoted shares (i.e., private companies) etc.

Institutional investors’ main reasons for investing in alternative assets

Source: Prequin.com

As can be seen, diversification and lower levels of volatility are two reasons often given as to why institutions invest in alternative assets. Investors need to exercise caution, though, when looking at historic measures of volatility and ensure they are comparing like with like. On the face of it, unquoted shares in private companies can appear to be less volatile than a quoted equity because quoted shares are priced daily. Unquoted shares in an investment trust/single country fund (i.e. fund) will typically be revalued quarterly, or maybe monthly. Therefore, at first glance, a fund that invests in unquoted shares may appear to be less volatile than a fund that invests in daily valued quoted shares. Cryptocurrencies, too, can appear to be more volatile simply because they are traded 24/7/365, as opposed to some other alternative assets - cars, art, real estate, or funds such as hedge funds, private equity funds or infrastructure funds - as these are typically revalued weekly, monthly and in some cases, quarterly. 

Interest from institutions in unquoted shares has been gaining momentum as can be seen by Danish pension funds which have invested more capital into unquoted shares than quoted shares in the last three and a quarter years up to March 2021. One way for smaller investors and the general public to become involved with alternative assets such as unquoted companies is by considering investment trusts. Unlike a mutual fund, which gets larger or smaller depending on the amount of capital that is invested, investment trusts are established and capital is raised. It is then usually agreed that the entity will be wound up after seven or ten years and the capital be returned to the investors. In the meantime, the money in an investment trust can be invested into illiquid assets (such as unquoted shares) on the basis that, in a few years’ time, the unquoted company will either be acquired or potentially listed on a stock exchange.

Record year for investment trusts fund raisings (£Billion)

Source: AITC

As the above chart demonstrates, 2021 has been a record year for investment trusts - many of which tend to invest in unquoted alternative investments. According to Investors' Chronicle, sectors proving to be popular in 2021 for investment trust managers in which to raise capital include space, infrastructure, renewable energy and digital infrastructure.

The EU has announced that it is looking to issue €250billion of Green Bonds (debt instruments to fund projects that have positive environmental and/or climate benefits) and this helps to explain why the Green Bond market, which only started in 2007, has grown by 95% p.a. The chart below indicates that the demand from investors seemingly continues to grow as they allocate an ever-rising proportion of their capital to sustainable investing.

% of High Net Worth’s portfolio allocated to sustainable investing

Source: Capgemini

According to EY: “Blockchain technology provides distribution and trust to serve ESG needs and should be provided as a utility, to focus on value instead of technology.” Indeed, in analysis carried out by EY, it also found that: “98% of institutional investors now evaluate non-financial metrics for investment decisions”, adding further, “Financial metrics will be combined with ESG data type, providing insights and forward-looking information for the decision-makers. As a consequence, blockchain will play an important role in the intelligent value chain”. The reason EY can make such a bold claim about blockchain-powered platforms is because this technology has the ability to bring transparency to the very complex supply chains which transport the plethora of raw commodities and manufactured goods around the world. The ability to track and trace commodities dug from the ground or grown in fields and then shipped thousands of miles to another country is now made possible using blockchains, together with other technology such as Internet of Things (IoT) QR codes, Radio-frequency identification, barcodes etc.

Companies such as Minehub and Covantis are good examples of how Blockchain technology is being used to solve the challenge of tracking goods, whereby enabling organisations to assure their customers of the provenance of the goods they are buying and their ESG credentials. Minehub, established in 2019, allows the buyers and sellers of minerals and metals to see, in real time, where their commodities physically are as opposed to relying on analogue-based procedures that historically required couriering or having documents emailed. Meanwhile, Covantis is a trade organisation that is run on the Ethereum Blockchain and has worked closely with ConsenSys. It is designed to help the agriculture industry be more efficient and be able to track and trace goods that are being moved across the world. To learn more about how Covantis functions, ConsenSys has complied a useful case study about which you can see more information by clicking here. 

With its website stating, “Guaranteeing Authenticity and Quality”, AgriLedger is another firm that has actually implemented a blockchain-powered solution resulting in farmers across Haiti receiving up to 7.5 times the amount they would have been paid to grow mangos, avocados etc. AgriLedger’s blockchain- powered platform enables farmers to track and trace the whereabouts of their produce is as it is shipped from Haiti to the USA. Recently, when talking to Genevieve Leveille, CEO of AgriLedger, she said: “Traditionally, when designing equitable systems, we often focus on the consumer.  If we were to start with the smallest or the most removed members of the supply chain, we find they often don't see much transparency in the value chain that they are a part of.  This can be acerbated by the lack of record management, and this creates great opacity that limits their ability to participate in the financial ecosystem and creates a great disadvantage. With AgriLedger we aim to promote the aspect of ‘Clear Trade’ - this is not about what is fair as fair can be something that is relative to an individual’s sense of entitlement.  However, if we can achieve a mechanism where data is trusted and immutable, then we can look to rebalance the stakes and create a system where rewards are based on effort not just risk taking.  Blockchain Technology allows for a record of what has happened and removes the doubts allowing for better collaborations among parties that normally would not be willing to have faith and trust in one another”.

Everledger was one of the first companies to use Blockchain technology to track and trace supply chains, so shining a light on the sustainability practices of the firms that use its platform. Recently, the Everledger platform has been harnessed by Cygnet Bay Pearl farmers so its clients will be able to have a digital certificate that records the history and provenance of the pearls they have bought.

Source: Cygnet Bay Pearl farmer

Meanwhile, a company that is using Blockchain technology to help monitor and assist organisations in meeting their ESG targets is Watr. This is worth keeping an eye since one of its co-founders, Maryam Ayati, has huge experience in the commodities business (having been ex-chairperson of the highly successful Vakt) and has led Shell’s LNG and Marine businesses. Furthermore, Watr’s co-founder, Clint Nelsen, also established Startup Weekend, which has a following of over 2 million developers and people looking to set up their own businesses.

However, it is not merely a question of being more efficient and therefore waste less food or minerals etc but being able to monitor the sustainability of farming and mining methods and enabling the end consumers to be more aware of the original source of the goods they are consuming. Simply by using QR codes on a product the end consumer can see who has grown the produce/made the item etc and, in time, it could show the carbon footprint or other ESG information. The question actually is, how long will it be before we see governments insisting that such information is made available as they tackle the challenges around climate change and monitor companies’ ESG credentials?