Listed companies offer real asset opportunities in a rising interest rate market

David Di Pilla (left), Scott Tully and Graeme Mather

Real assets embedded in listed companies provide opportunities for alternative asset managers looking to take advantage of the dislocation and volatility of listed markets.

Group Managing Director and Chief Executive David Di Pilla said investors could take advantage of mispricings in the market with listed companies such as Crown Resorts, Ramsay Healthcare and Sigma Healthcare which had real assets, including including real estate and infrastructure, integrated.

“We seek to take advantage of the dislocation and volatility in listed markets to access real assets at attractive valuations. By taking high-conviction strategic stakes in listed entities, we can access real asset opportunities that we believe could outperform over the long term,’ Di Pilla told Investment magazine‘s Absolute Returns Conference in Sydney earlier in September.

Di Pilla said most infrastructure companies had “largely disappeared” from the ASX and were now sitting in portfolios of industrial super funds that “probably never got out”.

There was also “not much” left in government balance sheets. “There is a shortage of assets and too much money for a limited opportunity set,” he said.

“As institutional capital flows continue to grow, we need to think broader and more creatively about matching capital with the opportunities embedded within listed companies and conglomerates that can provide uncorrelated returns.”

Real asset opportunities

HMC Capital recently acquired a 15% stake in Sigma Healthcare, which it sees as a strategic investment in an “asset-rich” company with attractive growth potential.

“It operates in an industry that has real barriers to entry. There are only three federally regulated national players, so the barriers to entry are high,” Di Pilla said.

“Second, it operates critical infrastructure through a nationwide network of distribution facilities. Think community pharmacy…which is to be delivered as part of the CSO [community service obligation] within 24 hours refrigerated safely at their doorstep.

HMC Capital began buying Sigma at 49 cents per share and took comfort in the fact that Sigma had 42 cents per share of asset backing following a $450 million equity investment in its distribution network.

“We’re creating asymmetric upside risk because if you have 42 cents in assets and you buy at 49 cents, the downside is limited, but if we get the thesis right, the upside can be quite significant.”

“We have now grown 30% in just over three months on our investment,” Di Pilla said.

Di Pilla targets investment opportunities that are not correlated to the broader markets with a backing to real assets and without much goodwill on the balance sheet.

“We look for assets with infrastructure like features that offer real pricing power and barriers to entry. Additionally, we seek companies with attractive reinvestment opportunities and exposure to attractive structural tailwinds. »

In addition to this, emphasis was placed on management and ‘enforceability’. “Can we work with management? Do we consider them to be economically rational in their decision-making? “, did he declare.

“Getting a level of influence is key for that, but working constructively to unlock that value is key. Obviously, you can’t invest around bad decisions and bad portfolio allocations.”

Speaking from Singapore at the conference, Di Pilla said Australian property assets were attracting investors from across Asia. “It’s time for Australia to shine with great interest from pan-Asian investors in the country,” he said.

Non-traditional assets

Former Colonial First State Investments managing director Scott Tully, who left his post last month, said real assets are about what isn’t part of a traditional portfolio of stocks, bonds and cash.

“Investing in companies provides exposure to economic growth. Bonds are about putting your money aside for a while, and cash is a risk-free asset,” he said.

“What are you missing? You’re not exposed to some of the drivers of the economy – the land, the buildings where we work and shop, and then you have the social structures that drive the economy – roads, airports, etc.

“Real assets are about making sure you’re invested in the broader economy and exposed to all of those elements.”

Real assets are things that aren’t stocks, bonds, or cash.

He said the definition of real assets was “in the eye of the beholder”, but one of the biggest challenges now was the mix between discount rates and inflation rates, their interaction and their link with a wallet.

“A regulated asset gives you a return profile, and in terms of the current scenario that investors are facing, what does your return profile look like if inflation is higher and economic growth is potentially lower,” Tully asked. .

“Is it protective of returns? You might have a stream of returns that increases with inflation or is the discount rate applied to those assets going to compensate for that? »

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