This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.
If you’ve been perusing the business pages this week, you may have noticed a big acquisition in the investment trust universe. Blackstone Group, the behemoth private equity manager, announced that it had agreed terms for the purchase of Industrials REIT.
This makes sense, several columnists have argued, with the trust on an especially broad discount relative to its recent history and the dynamics of the industrials segment of commercial property holding up especially strongly, even as the economy continues to flirt with the possibility of a recession.
Of course, it’s easier to argue this logic after a buyout specialist announces a near-complete deal for such a trust. Recent months have not been kind to alternative investments. Following several years of widespread popularity among professional and private investors alike, discounts have emerged or widened across alternatives sectors as investors have been spooked by the macroeconomic environment.
Rather than discuss what the Industrials REIT acquisition says about Blackstone’s strategy, for readers of Kepler Trust Intelligence it is instead worth looking at what it tells us about alternative investment trusts in 2023.
As mentioned, several sectors have seen their discounts widen as inflation and then interest rates rose. For some trusts this is a reflection of the longer-term attitude towards them; as we discussed in this recent piece, private equity investment trusts have long been victim to suspicions – justified or not – regarding the validity of their valuations and other sectors have also seen the reliability of their incomes called into question in an unforgiving period.
There is risk too in the indebtedness often associated with alternative investments. With most of the trusts that fall into this category using debt to fund their acquisitions, the danger that this is due for refinancing just as rates reach their peak is very real.
Combined, this picture has been deeply concerning for investors and has contributed to the generalized sell-off among these trusts. Yet, Blackstone’s acquisition of Industrials REIT at a premium to NAV suggests that the picture is not as universally dire as an indiscriminatory sell-off would indicate.
Firstly, the indebtedness of trusts can vary greatly both between and among alternatives sectors. Infrastructure trusts by nature tend to carry more debt than property ones, as do private equity vehicles. UK Commercial Property Trust (UKCM) is an example of a trust that carries particularly low gearing even for its sector, averaging at around 15%.
Further, the valuations and income generation available from underlying assets can similarly differ. Within a sector, or even a subsector, these differences can be stark. Take, given where we started this blog, commercial property.
Within industrials, even within warehousing, there can be significant differences in the characteristics of investments. So while some trusts focus on ‘big box’ out of town warehouses which facilitate nationwide delivery systems, some focus on edge-of-town smaller warehouses, which enable localized delivery.
For Industrials REIT, the emphasis was on edge-of-town industrial estates which have seen their valuations somewhat sheltered by strict planning legislation that limits competition. With the economy holding up more strongly than expected six months ago, these assets could be seen as unfairly punished by the market, given the steady incomes they generate.
Together this picture re-emphasises the value of looking under the bonnet of a trust when considering your portfolio allocation. With diversification a valuable risk mitigator for most investors, and the economic outlook far from clear, it could be self-defeating to turn away from alternative investments entirely. Instead, consider the individual characteristics of trusts within a sector, looking beyond performance to get a full picture of a potential investment.
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