UBP clients target niche alternatives

Illiquid investments such as aircraft financing, cat bonds and student housing are drawing interest, says Aman Dhingra, Singapore head of advisory at the Swiss private bank.
UBP clients target niche alternatives

Wealthy investors in Asia have been showing strong demand for niche private-market plays, such as commercial aircraft leasing, student housing and catastrophe bonds, said Aman Dhingra, head of advisory at UBP in Singapore. 

Over the past 12 months the bank's clients have been investing in private market investment opportunities involving European retail, commercial aircrafts, government-leased property as well as student housing.

“Client demand varies deal by deal but private market opportunities in general do generate strong interest,” Dhingra said. While these deals could either be equity- or debt-focused, recent deals have been tilted towards equity, he added.

One example of a recently concluded global deal, in which Asian clients participated, was a US real estate deal involving assets leased to the US government. 

“It was a safe tenant with mature properties, offering a yield play that was reasonably attractive, given the quality of the assets,” said Dhingra, declining to provide more detail, such as the size of the deal.

In addition, earlier this year UBP helped negotiate a deal whereby a group of clients bought a commercial aircraft and then leased it to an airline company. 

Most of these illiquid deals were for durations ranging from three to five years, with internal rates of return ranging from 8% for mature assets up to nearly 20% for riskier assets, Dhingra said. 

Student housing 

Another area that has seen strong demand from private clients is student housing in Europe. 

Even larger real estate funds are adding such assets to their portfolios, indicating that the investment theme is becoming more mainstream, noted Mercer’s Adeline Tan, head of investment advisory for Hong Kong.

However, she said, the challenge is finding enough stock that is good quality and diversified by student type, location and management company, as this is a more niche area than regular commercial property.

Tan added that another country that had seen increased queries on real estate since last year was Japan: “The interest is more focused on hotels, which direct property investors expect to do well because of the upcoming [Tokyo] Olympics in 2020. However, these are passing discussions, and not many clients have the in-house resources to invest directly in overseas commercial real estate.”

Dhingra agreed that direct investments were not suited for everyone. “Each opportunity attracts a specific pool of investors who are interested in that niche,” he noted. Such deals tend to be illiquid and will remain so for a number of years, so they draw more specialist investors who can afford the illiquidity, he added.

Cat bond appeal

The hunt for alternative forms of yield has also seen investors turn to insurance-linked securities (ILSs) such as catastrophe bonds, Dhingra said. ILSs offer clients a low correlation to both traditional assets and other alternative investments, he noted.

The performance of these products is linked to insurance events, meaning market timing is a less of a factor, said Dhingra. “Clients should take this into consideration when looking to add this asset class to their portfolios.”

Asian institutions have also shown interest in moving into ILSs, with South Korea's Public Officials Benefit Association issuing a $50 million mandate in December, in its first move into such assets.

Cat bonds transfer the risk of catastrophes such as natural disasters from insurers and reinsurers to investors via the capital markets.

Most cat bonds have a maturity of three to five years, and if an event covered by the bond does not occur in that time, investors receive their interest payments and principal at the end of the maturity period. But they can lose most or all of their principal and remaining interest payments if the event were to take place.

Catastrophe bond and ILS issuance for 2017 (January to July) stood at $10.1 billion globally, according to data from the Artemis Deal Directory. This figure included the highest quarterly issuance of these instruments ($7 billion) since the market's inception some 20 years ago, noted Artemis. 

Japan is the leading issuer of cat bonds in Asia, though the region is not a large contributor to the global issuance. Industry experts estimate that up to 70% of economic losses are insured in the US, but that figure is 30% or less in Asia.

Dhingra said the Europe and the US were the main sources of supply of cat bonds for Asia-based investors.

Nor has there been a big rise in cat bond issuance in Asia recently, said Sally Yim, Hong Kong-based senior vice president at rating agency Moody’s. “While catastrophe risk is quite significant in the region, the low level of insurance penetration does not warrant a high level of cat bond issuance at the moment,” she said.

Indeed, given that insurance penetration is low in the region, insurance company losses are also relatively low compared with economic losses sustained, Yim added.

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