Alternative assets are well known as attractive ways of enhancing returns. Over the years, alternative markets have outpaced public markets in returns. Traditionally, investment has been a function driven by two parameters namely period and amount. Besides, investment has been a delicate balancing act between risk and reward, a concept alternative investment downplays through a process called structuring.
In Kenya, the Banking Amendment Act 2016, which introduced the capping of the interest rates for banks on loans and advances by the Central Bank of Kenya has led to a significant drop in the interest rate market on both deposits and savings.
According to a market report by Cytonn Investments for the period between 2013-2018, real estate recorded an average per annual return of 24 percent, equities recorded 14.1 percent, one-year T-bill recorded 13.1 percent and 91-day T-bill recorded 9.2 percent.
It’s important to note that the market average return in this five-year period was 15.1 percent. As a result, Kenyan investors are slowly embracing this emerging world of alternative investments in various fields that include private equity, investment grade real estate, hedge and even private/credit debt.
In Kenya, the appetite for passive income and alternative assets is growing, therefore, this means that there is opportunity to both the investor and asset manager.
Investors should identify licensed alternative asset managers for useful advice on risk diversification, liquidity and returns.
Introduction of waivers on fund management fees leading to an overall higher yield to the investor has been witnessed in leading alternative investment firms in Kenya.
Structuring combines the benefits of alternative assets such as high return and benefits of traditional/public markets such as liquidity.
Globally, giant tech companies such as Google, Microsoft, Facebook and Amazon have entered real estate in a disruptive way. According to a PwC report on Alternative Asset Management 2020, emerging markets in Latin America and Asia, institutional investors and High-Net-Worth Individuals (HNWI) from China, represent a significant and largely untapped opportunity for alternative investment firms.
Alternative assets will continue to offer higher returns than traditional assets, therefore, in Kenya, the HNWI, private welfare and affinity groups and savings and credit institutions should take advantage of these opportunities.
As the effects of interest rates law last, and other requirements from the regulator such as capital adequacy, stress testing and liquidity of banks in Kenya, this raises cost of capital and, in some cases, banks have stopped financing real estate and other green field ventures.
Alternative asset managers should come up products like leveraged finance loans, asset class real estate financing and infrastructure loans, SME loans and private placement notes.
The writer is a private wealth manager, Cytonn Investments.