Alternative Assets Are a Commitment Strategy

With the right managers, alternative assets will deliver returns and diversification – LPs need patience and commitment to reap the rewards

Why should an investor allocate to alternatives?

Alternatives or private investments play two different roles in portfolios. Private investments provide correlation benefits and offer strong returns with a long duration, but your capital is locked in. That approach suits a long-term oriented investment program that doesn't have any liquidity constraints. Another important reason to consider private assets in the portfolio is the diversification benefits they offer. Some of the private asset classes can be completely uncorrelated to the rest of the portfolio.

What determines the success or failure of an alternatives strategy?

If you go by the capital market assumptions, private assets and predominantly private equity and venture capital are forecast to generate much higher performance than public markets. But the true difference is in the dispersion between the quartiles and deciles, which can be quite substantial. Having access to the right managers is very important, and that comes from building proper screening mechanisms, identifying the managers, understanding the strategy and teams, understanding how the returns are generated, and finally building long-term relationships. It takes time to build an alternatives program as vintage year diversification is very important.

How do you identify the right manager?

You need specialist teams and you need to invest in technology and databases such as Preqin to help track managers, understand vintage years, and see who the top managers are, year in, year out. You scan the universe to find the right managers and work on finding the best way to build access. Track record is important, but you need to identify the actual alpha being generated by the team, as opposed to what’s just from the market. There are many factors at play: strategy, team, talent, sourcing, and so on. You also need to try to look through the funds to the portfolio company level to understand sector and geographic exposures. It’s not science and it’s not art – it’s a combination of the two.

Are you concerned by fee levels?

Fees are important, but it’s more around how they’re structured than the absolute amount. Does carry align the interests of the team, the GP, and the LP? Are all the different team members properly incentivized to create long-term value? For example, there’s a focus on the percentage the GP contributes to the fund, but it’s important to look at that from the GP’s personal perspective and see whether it’s a meaningful amount for them personally, which will be of a different magnitude for emerging managers than established managers.

What advice would you give to someone considering starting an alternatives program?

Be patient. It takes time, resource, and a lot of effort to find the right partners, and manage and monitor your program. You need adequate infrastructure and need to invest in technology to not only identify the right fund managers, but also to manage the ongoing oversight, plan cash flows and capital commitments, and to maintain relationships. It’s about striking a balance between a meaningful group of managers while maintaining the diversification benefits.  

And you really need to identify the right partners and take a long-term view – the right manager will generate returns across market cycles.

About Miras Management

Miras Management is an institutional family office based in Dubai with a global investment remit. It takes a long-term view of investing and follows an endowment model with a multi-asset portfolio. Alternative asset classes are an important component of the portfolio and Miras looks to have long-term relationships with managers, often taking a counter-cyclical view.

Vignesh Vijayakumar is the COO/CFO of Miras Management.

This article originally appeared in the Alternatives in the Middle East: Transforming Economies report. The opinions and facts included within the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin and Miras Management providing the information in this content accept no liability for any decisions taken in relation to the above.