On The Hunt For New Asset Classes - Recurring Revenue, Co-Working, Carbon, Crypto & More
The primary objective of family offices is wealth preservation 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 reduced risk and lower yet steady 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 the low-interest environment, improved capabilities on the investment management front and the need to hedge against bonds and equities, family offices have broadened their focus to include alternative investments in their family office asset allocation. As a result, many are actively hunting new opportunities in emerging asset classes, some of which are based on traditional asset classes, while others are entirely new. Here's a look at the emerging asset classes capturing 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 fixed income-like products for recurring revenue streams.
Many subscription-based SaaS and e-commerce companies realize that equity and debt are not optimal ways to finance growth. As a result, opting to trade their monthly recurring revenue to secure upfront revenue without dilution and debt burden is becoming increasingly attractive.
These deals are brokered via platforms like Pipe that offer capital markets direct access to early-stage businesses, bootstrapped companies and publicly traded entities. Pipe has a proprietary rating model, similar to Fitch/Moody's ratings for bonds, that provides a uniform way for investors to evaluate recurring revenues. It incorporates hundreds of anonymized data points on each company, including revenue, burn rates, and performance of customer cohorts. It also gives investors a complete and transparent view of the underlying business for each recurring revenue on the Pipe trading platform.
Michal Cieplinski, Chief Business Officer at Pipe, explains the benefits of using the platform, "Family Offices face a continuous struggle to source assets and match them to their yield expectations. In the last few years, both equities and fixed income have moved in the same direction and are highly correlated.” Cieplinski also stresses that yield expectations were out of sync with what was traditionally available on the market, “With the introduction of recurring revenue on Pipe’s trading platform, Family Offices can now access a stable, capital preserving asset class with returns significantly exceeding current fixed-income yields, hence better matching their yield expectations."
The COVID-19 pandemic has shifted the way the world works. Currently, companies are weighing what the return to the office may look like in the future when assessing their existing spaces. All indicators point to a massive shift towards hybrid workplaces with greater flexibility becoming the norm. A joint study by CoworkingResources and Coworker predicted that the flexible office space industry will "rebound in 2021 and develop even more rapidly from 2021 onwards, with a yearly growth rate of 21.3%."
Co-working spaces are thus fast becoming an emerging asset class. They are regarded as a separate asset class due to their unique risk profile with the primary variable based on the tenant's ability to pay rent. According to Lucas Rotter, CEO of appraisal software developer Valcre and a former appraiser for a wide range of asset types at Collier, co-working has similarities to hotels. He states, "This is the hotelification of office space. With hotels, you've got a higher cap rate range than you typically do with office space. Specifically, because one-night leases cause a higher risk tolerance."
Cryptocurrency, Digital Assets & Blockchain
The ever-expanding digital asset universe currently has an estimated market value of $2 trillion and a user base of over 200 million. This makes digital assets a prominent emerging asset class for family offices seeking alternative options. In addition, the fact that cryptocurrencies and digital assets do not correlate to any other asset classes makes them an attractive choice when diversifying family office portfolios.
According to Jodie M Gunzberg, CoinDesk Indices Managing Director, this is exactly what’s happening, “We have heard massive interest in digital assets from family offices as they look for opportunities to diversify, generate income and have the chance for upside potential amid concerns over inflation, rising rates and COVID, which may significantly impact the value of their traditional assets like stocks and bonds. Also, for family offices focused on ESG, there is much potential to influence the acceleration of sustainable power.”
While Bitcoin is the most renowned cryptocurrency with a significant market value of around $900 billion, according to Candace Browning, Head of BofA Global Research, "This isn't just about Bitcoin anymore. This is digital assets, and it's creating a whole ecosystem of new companies and new opportunities and new applications."
Blockchain is an enabler of many of these new asset classes. Not only is cryptocurrency trading built on it, but the technology is also rapidly being adopted across multiple verticals as a value-add to businesses. Venture capitalists' digital assets and blockchain investments totaled $17 billion in the first half of 2021, a significant rise from $5.5 billion last year.
As the war on climate change intensifies, carbon trading is emerging as a new asset class. The carbon market grew by over 20 percent in 2020, its fourth year of consecutive growth.
Two primary markets exist - Compliance carbon markets (CCMs), where mandatory national, regional, or international regimes trade and regulate carbon allowances and Voluntary carbon markets (VCMs), where companies and individuals trade carbon credits voluntarily. CCMs are the more mature of the two, with VCMs only just emerging. CCMs are valued at over $100 billion with an annual trading turnover above $250 billion. VCMs were valued at $300 million in 2020.
According to the CFA Institute, "Emissions Trading Systems (ETSs) are a climate policy instrument designed to provide effective carbon pricing. Carbon traded in these markets can be viewed as an attractive asset class with well-understood risk premium drivers."
While institutional investors have played a limited role in these markets, this is changing. Trading carbon credits helps organizations to reach their net-zero carbon targets, supports the global climate agreement and contributes to protecting the environment. For family offices with mandates focused on diversification into sustainable investments, this is an interesting opportunity to get into 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 wines, collectibles like sports memorabilia, Pokemon cards, Non-fungible tokens (NFTs) and Funko (FNKO) figurines are all becoming part of a new emerging asset class. It is estimated that the collectibles industry was worth $412 billion in 2020 and that it is expected to reach $628 billion by 2031.
Digital NFT Market Collectibles is the fastest-growing segment with a CAGR of 14.2% during the forecast period. Certain products within this segment experience up to 1,400% growth in a quarter (i.e., around 14 times the market). Given these facts, it is little wonder that venture capitalists and market giants are entering the market and family offices may follow suit.
As existing market trends continue, the search for yield drives family offices to explore more speculative asset classes than ever before. This is equally daunting and exciting, but opportunities are quite clearly there for the taking.