Right time to tap into alternative investments

ANYONE well-versed with the Malaysian capital markets will espouse the idea that for solid and dividend bearing investments, it would be best to be banking on the banks, pun intended.

While it is nothing new that lenders form a majority of the blue-chip companies on the FBM KLCI, the advent of private equity activities and the rise of creative online startups in recent years have whetted the appetite of investors for alternative forms of investments (alternatives) and financing.

In fact, as chief executive and co-founder of Singapore’s Alta Alternative Investments Pte Ltd, Kelvin Lee puts it, demand for alternatives has increased significantly, with order volumes on the company’s exchange showing a year-on-year (y-o-y) growth of over 300%, or fourfold, in 2023.

Although it continues to be true that Singapore has always led the way in terms of being an alternative assets and startup hub in the region, Lee observes that the alternatives market in Malaysia too is gaining steam.

“Over the past year, we have seen progressive growth of new and fast-growing enterprises looking to raise capital.

“On the demand end, there are more investors keen on diversifying away from public markets and have started to explore opportunities in robust alternative assets,” he tells Starbizweek.

Yet, he concedes that the reality for the moment is that the individual Malaysian investor remains under-invested in alternatives, stating that the current risk-off sentiments are definitely being expressed in their preference for banks.

Elaborating, Lee says it is difficult to argue with the fact that banking groups in Malaysia have generally proved they are able to provide a safe haven to investors for dividend returns regardless of market conditions.

“Looking at the FBM KLCI, nearly 30% of the entire market capitalisation is controlled by banks,” he notes.

Providing a caveat, he says if recent history has taught the retail investor anything, it is that risks in the public markets cannot be taken for granted, as even the world’s strongest banks are not immune from collapse.

As such, individual investors will do much better taking a leaf out of their institutional counterparts, by diversifying into vehicles and alternative investments to hedge their risks, with Lee revealing that some well-known sovereign funds have deployed over 50% of their holdings in private market assets.

Additionally, he points out: “Given the promising and dynamic outlook of alternative investments amid global uncertainties, we believe now is the time to tap into alternative investments.

“There is a growing appetite among the micro, small and medium enterprises space not only in Malaysia but also globally, turning to alternative investments to further diversify their portfolios beyond traditional avenues.”

He believes that Malaysia’s private market scene is dynamic and exciting, and the country is seeing an increase in interest from investors looking to channel funds into private companies that offer promising returns.

Lee attributes this optimism to the rapid growth in investor participation and innovative companies that hail from a variety of sectors, such agritech, venture capital funds, and even non-tech sectors like food and beverage as well as media.

Fear of scams

While talk about alternative investments as opposed to “boring” but solid banking stocks may appear refreshing, fraudulent schemes that seem too good to be true are a dime a dozen out on Malaysian streets, forcing many potential investors to put their guard up.

In fact, an old study back in 2016 revealed that Malaysia is one of the most gullible countries when it comes to online scams, as Tradeview Capital chief investment officer Nixon Wong says that combating scams is a joint responsibility between the authorities and the public.

He calls on individual investors to approach offers that seem too good to be true, especially those promising quick and high returns on investments, with scepticism.

“Be wary of investment opportunities guaranteeing returns and conduct thorough research to stay vigilant against potential scams,” he says.

In addition, he emphasises the importance of Malaysians staying informed by following various newsflows to remain updated on the latest scam tactics and techniques, to maintain effective vigilance against various types of frauds.

According to Alta’s Lee, financial literacy is key to avoiding fraudulent investment pitfalls, especially in today’s ever-evolving financial landscape.

“Looking at local statistics, the digital financial literacy rate among Malaysians remains persistently low, averaging 15 new cases investigated daily from January to October in 2023,” he reports.

Resonating with Tradeview’s Wong, he says financial literacy is not just individual responsibility but a collective effort involving education, regulation, and collaboration to build a resilient financial ecosystem that empowers investors and protects them from potential risks.

Moreover, he says given the dynamic financial landscape of today, fostering financial literacy and ensuring transparency in alternative investments are crucial for safeguarding the interests and financial well-being of investors.

As such, Lee believes that platforms like his company Alta can do more to improve awareness of alternative assets and what investing in them entails.

“This way, investors will have the right tools to navigate the diverse landscape, as well as understand the unique characteristics and key benefits of the various alternative investment opportunities,” he says.

“Over the past year, we have seen a progressive growth of new and fast-growing enterprises looking to raise capital.”

Meanwhile, he commends government agencies such as Bank Negara and the Securities Commission (SC) that have introduced and improved several regulatory frameworks and standards designed to provide investors with better access and options, as well as a sense of security as investors deploy to opportunities.

Suggestions and outlook

Tellingly, Lee reports that while individual investors hold roughly 50% of the estimated US$275 trillion to US$295 trillion of global assets under management (AUM), they make up only 16% of AUM held by alternative investment funds.

To achieve a well-diversified portfolio, he suggests for investors to consider modifying their traditional 60/40 allocation and diverting between 10% and 15% of their portfolio to alternative asset classes such as private credit, real estate, and infrastructure.

Summarily, private credit ventures are debt-like, non-publicly traded instruments provided by non-bank entities, such as private credit funds or business development companies, to fund private businesses.

Private credit differs from private equity such that the former is essentially a loan with the creditor not taking any shares in the business, while the latter funds a business by doing exactly the opposite, acquiring its shares.

Lee says Alta is enabling its investor community to directly access, invest and trade in a wide range of alternative investment opportunities, encompassing investments in prominent global private companies like Space Exploration Technologies Corp or more commonly known as Spacex, Epic Games Inc and instant message platform Discord.

On top of that, investment into global private equity credit funds such as Silverlake Technology Management and Hamilton Lane, as well as real assets of rare whisky and wines are also made available on Alta, says Lee.

“We serve as a conduit for investors seeking to broaden their investment horizons and mitigate the inherent risks associated with concentrated exposure solely to Malaysian private markets.

“This strategic approach aligns with the imperative for investors to prudently navigate the prevailing economic uncertainties by diversifying their investment portfolios across global spheres,” he remarks.

As a whole, he is expecting private credit to gain momentum amongst small and medium enterprises in Malaysia, as well as listed companies for short-term funding.

Citing investment data entity Preqin Ltd, Lee says a total of 38 Asian private funds had raised Us$10.24bil in 2022 for such lending, compared with Us$2.17bil from 34 funds in 2013.

From an investment perspective, he is of the view that private credit can be a good addition to a mature investment portfolio.

“Private credit, which typically embraces a floating interest rate, is more likely to perform well as a hedge against inflation and offer higher yields than those in traditional fixed-income and equity markets,” he says.

Family offices as an alternative

In an earlier conversation with Starbizweek, Lee had suggested for Malaysia to look into alternative investments to bolster its attraction with foreign investors, which would undoubtedly strengthen the ringgit.

One of the alternatives he proposed was the setting up of more family offices in the country.

“Malaysia can look into creating a conducive environment for wealth management and investment activities that it can uniquely offer to attract family offices and high-net-worth individuals (HNWIS).

“In turn, the potential introduction of family offices could similarly attract more HNWIS and investors seeking wealth management services and investment opportunities,” he says.

Commenting that recent initiatives by the SC such as the Capital Market Development Fund, have been instrumental in providing grants and incentives to facilitate the growth of the financial services sector, he says Malaysia can consider launching more similar initiatives.

These steps offer financial support and capacity-building plans to nurture the venture capital ecosystem, thereby encouraging investment in innovative and highgrowth companies, Lee explains.

Bringing up another option, he says Malaysia can offer better tax incentives and exemptions to family offices and HNWIS, similar to those provided by Singapore.

Giving the Labuan International Business and Financial Centre a thumbs-up, he says tax advantages can incentivise the establishment of family offices and encourage investment activities denominated in the ringgit.

“The Labuan Financial Services Authority already offers a competitive tax regime and a conducive regulatory environment for wealth management activities,” observes Lee.