The primary purpose of family offices is wealth conservation and growth to ensure long-term recurring revenue for generations to come. Traditionally these goals have dictated investment strategies, favoring relatively safe asset classes with low risk and low yet stable payouts. As a result, real estate, blue-chip stocks and bonds have made up the bulk of most family office investment portfolios.
In recent years, driven by a low-interest environment, better capabilities on the investment management front, and the need to hedge against bonds and equities, family offices have shifted their focus to include alternative investments in their portfolio. family office asset allocation, As a result, many are actively looking for new opportunities in emerging asset classes, some of which are based on traditional asset classes, while others are completely new. Take a look at the emerging asset classes that are gaining attention in the alternative investment space.
Recurring revenue as an asset class is based on traditional fixed income but with higher liquidity and diversification. It allows investors to invest in products such as fixed income for recurring revenue streams.
Many subscription-based SaaS and e-commerce companies feel that equity and debt are not optimal methods for funding growth. As a result, the option of trading your monthly recurring revenue to secure upfront revenue without the dilution and debt burden is becoming increasingly attractive.
These deals are brokered through platforms like Pipe which provide direct access to the capital market to early stage businesses, bootstrapped companies and publicly traded entities. Pipe has a proprietary rating model, similar to Fitch/Moody’s ratings for bonds, which provides investors with a uniform way to evaluate recurring revenue. It includes hundreds of anonymized data points on each company, including revenue, burn rate, and performance of customer groups. It also gives investors a complete and transparent view of the underlying business for each recurring revenue on the pip trading platform.
Pipe’s Chief Business Officer, Michael Siplinski, explains the benefits of using the platform, “Family offices face a constant struggle to source assets and match their yield expectations. Over the years , equities and fixed income have both moved in the same direction and are highly correlated.” Siplinsky also emphasized that yield expectations were out of sync with what is traditionally available in the market, “Trading of the Pipe With the introduction of recurring revenue on the platform, Family Offices can now access a stable, capital-protected asset class with returns significantly higher than current fixed-income yields, so their yields better match expectations.”
The COVID-19 pandemic has changed the way the world works. Currently, companies may look to return to the office in the future when assessing their existing spaces. All indicators point to a massive shift towards hybrid workplaces with greater flexibility. a joint study by Peer Resources and Colleagues predicts that the flexible office space industry will “rebound in 2021 and grow even more rapidly from 2021 onwards, with an annual growth rate of 21.3%.”
Thus co-working space is fast becoming an emerging asset class. They are treated as a separate asset class due to their unique risk profile with the primary variable being the tenant’s ability to pay rent. The co-working has similarities to hotels, according to Lucas Rotter, CEO of valuation software developer Valkre and a former appraiser for a wide range of asset types at Collier. He says, “It’s hotelization of office space. With hotels, you usually have a higher cap rate limit than with office space. Specifically, because one-night leases lead to higher risk tolerance.”
Cryptocurrency, Digital Assets and Blockchain
The ever-expanding digital asset universe currently has an estimated market cap of $2 trillion and a user base of over 200 million. This makes digital assets a major emerging asset class for family offices looking for alternative options. Furthermore, the fact that cryptocurrencies and digital assets do not belong to any other asset class makes them an attractive option for diversifying family office portfolios.
According to Jody M Gunzberg, managing director of CoinDesk Index, “We have heard huge interest in digital assets from family offices as they seek potential opportunities to diversify, generate income and amidst concerns over inflation.” , rising rates and COVID, which can significantly impact the value of their traditional assets such as stocks and bonds. In addition, for ESG-focused family offices, there is great potential to affect the acceleration of sustainable power .
While bitcoin is the most well-known cryptocurrency, with a significant market cap of around $900 billion, according to Candace Browning, Head of BofA Global Research“It is no longer just about bitcoin. It is a digital asset, and it is creating a whole ecosystem of new companies and new opportunities and new applications.”
Blockchain is the originator of many of these new asset classes. Not only is cryptocurrency trading built on it, but the technology is increasingly being adopted across multiple verticals as a value-add to businesses. Venture capitalists’ digital asset and blockchain investments totaled $17 billion in the first half of 2021, up from $5.5 billion last year.
As the war on climate change intensifies, carbon trading is emerging as a new asset class. Carbon market to grow by more than 20 percent in 2020, its fourth year of continuous growth.
Two primary markets exist – compliant carbon markets (CCMs), where mandatory national, regional or international arrangements trade and regulate carbon allowances, and voluntary carbon markets (VCMs), where companies and individuals voluntarily trade carbon credits. CCMs are the more mature of the two, VCMs are only emerging. CCM is valued at over $100 billion, with an annual trading turnover of over $250 billion. VCM was valued at $300 million in 2020.
According to CFA InstituteThe Emissions Trading System (ETS) is a climate policy tool designed to provide effective carbon pricing. Carbon traded in these markets is an attractive asset with well-understood risk premium drivers. can be seen as a class.”
While institutional investors have played a limited role in these markets, this is changing. Trading Carbon Credits helps organizations reach their net-zero carbon goals, supports global climate agreements and contributes to protecting the environment. For family offices with a mandate focused on diversification into sustainable investments, this is an interesting opportunity to enter an immature but growing market. However, as with many sustainable investments, greenwashing is common, so securing advisors with experience in the field is highly recommended.
Like fine art and vintage wine, collectibles such as sports memorabilia, Pokémon cards, non-fungible tokens (NFTs) and Funko (FNKO) figurines are all becoming part of a newly emerging asset class. It is estimated that the collectibles industry was Valued at $412 billion in 2020 and expected to reach $628 billion by 2031,
The digital NFT market collectibles is the fastest growing segment with a CAGR of 14.2% during the forecast period. Some of the products in this segment experience growth of up to 1,400% in a quarter (ie, around 14 times the market). Given these facts, it should come as no surprise that venture capitalists and market giants are entering the market and family offices may follow suit.
As current market trends continue, the search for produce is prompting family offices to explore more speculative asset classes than ever before. It is equally challenging and exciting, but the opportunities are quite clear for the taking.