Sydney Airport delisted from the ASX in 2022 after some private investors paid $24 billion for the company. The shift in ownership means Sydney Airport is no longer part of the equities asset class.
Once available to buy or sell as a share on the ASX, the airport was delisted this March after the ACCC approved a takeover bid from a consortium that included IFM Investors, QSuper, and US-based Global Infrastructure Partners.
Australia’s largest airport is now classed as a private-equity investment. As such, it is an alternative investment, as in an alternate to the main asset classes of bonds, cash and equities. The investment industry loosely groups any investment option not considered mainstream as an alternative investment.
Such investments are of interest because they seek absolute, rather than benchmark-related, returns. The aim of alternatives to provide a positive return in all market conditions means they offer diversification benefits.
Alternative investments can be confusing because there are so many options. The best way to demystify alternatives is to realise that most of these investments fall into two categories.
The first covers privately owned assets. The most prominent is private stakes in companies. The attraction of private equity is that people can invest in a wider array of businesses. The most appealing part of this spectrum are the companies still too small to list that are poised to be the stars of tomorrow. Facebook, before it listed and later changed its name to Meta, was one such opportunity.
At the other end of the spectrum lie big companies including listed ones taken private like Sydney Airport. Large companies that have turned private often gain from a revamp or the sale of some assets. Management teams can often revitalise privately owned companies because, free of the regulatory burden and media scrutiny of being listed, they can make long-term decisions.
Within the private ownership category sits private credit. Investing in the debt of private companies can offer investors debt instruments that offer attractive income streams. That much private credit comes with floating rates mean private debt has a low correlation to publicly traded debt, which typically comes with fixed coupon rates.
Other privately owned assets can include property and infrastructure, often called ‘real assets’ to distinguish them from financial assets. Private real estate is a reliable source of income that generally beats the return on government bonds. Infrastructure covers everything from toll ways to satellite towers to airports. The nature of such businesses (inflation-adjusted prices and government-protected returns) mean they display different characteristics that most equities.
The other big category of options within the world of alternative investments are hedge funds. This term describes strategies that seek to derive returns that are detached from the performance of benchmarks. Hedge funds can come in the form of equity-hedge, event-driven, relative-value, macro and multi-strategy options. Each of these investment styles can be further sub-divided into activist, global-macro, long-short, managed-futures, market-neutral, and merger-arbitrage strategies, just to name a few.
Whatever the alternative option, see them as vehicles to protect your capital and diversify risk while hopefully generating decent positive returns.
Private assets, to be sure, comes with risks. These ownership stakes are illiquid, thus it can take time to find a buyer. The lack of public reporting can make it hard to value privately held investments. Unlisted investments are subject to same economic and political forces as listed or conventional securities. They might bounce around much the same in the short term. Hedge-fund strategies are often opaque and rely on debt to magnify potential returns, which boosts risks.
However, a portion of an investor’s portfolio that is aiming to post positive returns year after year is a valuable part of that portfolio, whether than portion is invested in large private equity assets such as Sydney Airport, the next Facebook, private credit or a global-macro hedge fund.
