There are three elements to consider when investing in this asset class: 

1. Lack of liquidity. Private equity investing naturally lends itself to long-term time horizons, with typical investment horizon of five to 10 years. 
2. More debt. Businesses owned by private equity tend to have more debt on their balance sheets than publicly listed counterparts, as using more debt can increase equity return. Albeit post the Global Financial Crisis, private equity investors tend to be more disciplined with the use of debt. 
   
3. Higher risk, higher return. Private equity’s lack of liquidity, potentially higher use of debt and market or sector specific risks make it a higher-risk investment. However, private equity investments can potentially deliver higher returns than investments accessible on a public stock exchange. 
   

So, with minimum ticket sizes of $10 million for an investment in private equity, how can you invest? Investing in a listed investment company (LIC) can provide investors with access to an actively managed portfolio with diversification benefits. 

WAM Alternative Assets (ASX: WMA) is the only LIC in Australia offering retail investors access to a well-diversified portfolio of alternative assets, including private equity. 

Diversification and cash flow are key

Another way to invest through a period of uncertainty is to look for Australian companies with consistent, reliable cashflows from a product or service with a clear competitive advantage. Ultimately it is profit from these cashflows that will lead to a company’s ability to pay you dividends. 

To give yourself the best chance of investing in a company with consistent dividends, always analyse two key metrics:

• The first is to look at the company’s historical dividends to see if they have been consistent over a number of years.
• Secondly, look at the company’s dividend payout ratio and ensure it didn’t suddenly increase based on a one-off event. The average dividend yield for the largest 200 companies on the ASX is about 4%. If a stock is yielding say 15% then it is less likely this can be maintained, and that stock needs further analysis before investing to avoid potential disappointment.

Tech investing: power of the cloud

The hyperscalers are also “democratising” application development, making it easier for people and organisations to use AI. Another 500 million new applications are projected to be developed in just 5 years to 2023 [3]. They are also enabling an explosion in connected devices that will see data generation increase from 30 Zettabytes to 157 Zettabytes by 2025 [4]. And they are using vast quantities of data to train machine learning models. 

These developments are going to require far more cloud computing and storage than most analysts forecast, in Montaka’s opinion.

The confusing world of Sustainable Investing

While it might feel like the right thing to do, dig deeper, and it doesn’t make much sense.  Is it practical to stop flying, to renovate your house to make it as energy efficient as possible, and to stop eating meat entirely? 

Excluding “bad” companies does not mean that they will go away. Starving companies of capital when they urgently need to invest in infrastructure and equipment to decarbonise seems counterproductive too. And by having less responsible shareholders as owners, companies with lower ESG scores may not necessarily improve their behaviour either.

Energy and natural resource companies are an obvious example of the conflict that investors face. The world needs commodities like copper for many more decades if we are to reach the ambitious goal of net zero carbon emissions by 2050. Shareholders in these companies have an important role to play to ensure that these companies are minimising their carbon footprint, investing in technologies to open new markets, and being operated safely for employees and the environment.

At Firetrail, we think the better sustainability approach is to identify companies that are current or future sustainability leaders in their industries, rather than relying on external rating providers for a backward-looking assessment of ESG criteria.

We have found the best opportunities are companies that have the same sustainability characteristics. They have sustainable business models; they have sustainable earnings, and they are contributing to sustainable positive change. These are the S3 characteristics we look for in a company.

When you approach sustainability investing from a lens of improvement, rather than simply buying richly valued companies that the industry deems to be “good”, it leads you to buying companies that have been rejected by the standard approaches to ESG investing, as they don’t tick the right box on the assessment checklist.

It results in a portfolio that is very different to a global equity index, or the biggest active global equity funds that are too often filled with global technology names. It leads to a truly unique portfolio of companies that are contributing to positive change in the world.

For example, some of the companies in the Firetrail S3 Global Opportunities Fund include a Chilean copper miner that is aiming for 100% renewable use, a North American biofuel producer that uses old cooking oil from restaurants to manufacture renewable diesel, and a French train manufacturer that is developing electric and hydrogen powered trains.

We believe that if a company can be encouraged to clean up its act and improve its ESG profile, it will become more acceptable for a broad array of investors to hold it, and so its share price will likely rise. As more firms commit to managing capital in a sustainable way, this will drive higher valuations. Putting it bluntly, sustainable businesses deserve premiums.