High net worth investors eyeing long-term growth assets in the wake of COVID-19

Amid the volatility caused by the COVID-19 pandemic, high net-worth investors are still on the lookout for ways to deploy their capital in private markets.

That’s according to listed investment fund Auctus Investment Group (ASX:AVC), which specialises in mid-market private equity opportunities.

The low interest rate environment over the past decade gave rise to strong growth in private markets, as global private equity funds built up record amounts of capital.

But speaking with Stockhead, AVC managing director Campbell McComb said investor interest in the space off the back of the COVID-19 disruption had still been pleasantly surprising.

“I think there’s two key driving factors behind that; one is the volatility in ASX and other markets, and the other is the very low cash rate,” he said.

“Are you better off having your money in the bank, or can you invest in something like our Student Quarters fund which is an asset backed yield play where you’re getting a six per cent return?

“Or in the case of our energy infrastructure play, there’s no initial yield there but our expectation is for a 25 per cent+ Internal Rate of Return coming out of that business over a 3-4 year time frame.”

McComb said that for a high net worth investor, these types of investments form a “crucial” part of their broader portfolio.

“What component that is can vary from five per cent to 50 per cent, depending on who you’re talking to,” he said.

“But it certainly offers a bit of diversification from direct equities and fixed interest, and also has the ability to boost the portfolio a little bit in terms of overall return.”

US college housing still in demand

Earlier this week Auctus announced the signature of a joint venture with Student Quarters, a US college student housing asset manager.

Auctus will launch a $US50 million ($71.5 million) fund to invest in Student Quarters’ fund and attempt to build it to $US250 million ($357.4 million) over the next three years.

On the one hand, investments in university services may deemed to be more risky in the wake of the pandemic, because many campuses will be online only or at least a hybrid of in-person and online.

But McComb says that even if not all learning is face to face, the company still anticipates occupancies being high based on their experience in the 2020 spring semester (January to May) as COVID-19 lockdowns began.

“The asset class has held up pretty well considering the conditions in that student quarter space,” he said.

“We’ve got an expectation over three quarters of the colleges will either be back on campus, or using a hybrid of campus and online. So therefore majority of students are going to be in and round the campus, as we would expect them to be despite the COVID situation.”

“Even if you do end up going online – and this is what we found at the end of the last semester; even though students moved online, they didn’t want to stay there because the alternative is being in isolation with your boring parents.”

“I think a lot of the kids wanted to stay to still have the college atmosphere which has proven to be the case recently.”

Energy storage popular too

As for its Energy Storage fund, Auctus closed oversubscribed at US$33.5 million ($47.9 million).

McComb says the company observed several US states, starting with California, that were seeking to go 100 per cent renewable.

“In our view the only real way to get there is storage- sun only shines, the rain only falls and the wind only blows for certain parts of the day,” he told Stockhead.

“So it’s important to have storage and have that storage near where communities are so they almost become self-sufficient in that they leverage off their storage as and when is needed.”

“We think it’s ready to take off in terms of the growth that’s going to come through over next two-three years.

“It’ll become like wind and solar have in the US, we think it’ll become a key component of the grid and we’re excited about where that business is positioned.”

Pooled development funds and bonds

Another ASX listed company reporting demand for investment alternatives to stocks and cash is Generation Development Group (ASX:GDG).

Generation Development Group offers clients pooled development funds (PDFs) and investment bonds.

The former is a fund structure that makes private equity investments, specifically in small-to-medium enterprises (SMEs). The government grants investors a lower tax rate on such investments.

Earlier this week Generation reported an all time company record of $90 million for quarterly inflows and now has nearly $1.3 billion in funds under management.

It noted with respect to bonds it also noticed a decline in withdrawals and maturities – indicating investors were keen to hold their investments.