Generally, traditional investment managers are valued on the basis of relative performance, compared to the performance of a benchmark, such as the FTSE MIB index, the S&P 500 or the rate of return offered by Treasury Bonds (BTP). In bearish cycles of the market, traditional managers are remunerated for having lost less than the benchmark of reference or less than competitors have.
In alternative investments, however, managers have the objective of generating independent absolute returns with low correlation to traditional market indices. This last result is obtained by investing in event-driven opportunities purposely researched, analyzed and selected, or by investing in inefficient areas of the market in which competition with adequate experience is very limited. This type of investments include, among others, real estate, opportunistic credit and special distressed situations (s.c. “special situations”).
From an investor’s perspective, diversifying traditional and alternative investments can provide a balanced allocation of portfolio assets, improving its overall return and reducing volatility. Alternative investments are generally divided into different segments based on the specific characteristics of the potential transaction. The latter are usually identified as “Core”, “Core +”, “Value Add” and “Opportunistic” investment strategies. Each of these strategies is located at a different point in the risk-return spectrum, based on the complexity of the transaction and the managerial needs of the latter. “Core” investments are considered the least risky and with lower expected return profile, while “Opportunistic” investments are the most risky, mainly due to their complexity, but with a higher expected return for investors.
This type of investment is considered the least risky, aiming at stabilized products, fully leased or guaranteed by the underlying in stabilized markets, such as, for example, commercial real estate assets of Class A, located in highly competitive areas and with long-term lease contracts towards high standing counterparties. Therefore, this type of investment generally does not present a significant appreciation of the value of the product, but rather provides a stable and predictable cash flow with a relatively low risk, meeting the wishes of investors who seek stable cash flows and the preservation of capital on relatively long time horizons. “Core” investments, by virtue of their stability and marketability, are the most liquid if compared to the “Value Add” and “Opportunistic”.
These investments are similar to “Core” ones but are characterized by a slightly lower quality level. In the case of commercial real estate assets, the property could be located in a secondary location or the tenant could be a local company with a lease to be renegotiated. “Core+” investments are characterized by a moderately low risk and slightly higher yields than the “Core”, but with a slightly lower time horizon.
“Value Add” investments, in general, include transactions characterized by an already present cash flow, with the aim of increasing this flow over time, making structural improvements or strategically repositioning the property. The feasible strategies could include the renovation of the property to allow the collection of higher rents, the lease up of vacant spaces, the improvement of the tenant mix, reducing the risk of cash flow, or the efficiency of management of the building reducing operating costs where possible. Once the strategy is implemented and cash flows are increased, the assets are disposed to capture their value appreciation compared to the time of investment. This type of investment uses medium-high financial leverage, for acquisition and possible investments, reducing the amount of capital required and optimizing returns. “Value Add” investments generate higher returns compared to “Core” and “Core+” investments thanks to the appreciation of the value of the underlying asset, but they also entail greater risks as, in the investment phase, the assets do not operate to their full potential. For many professional investors, this type of investment provides a perfect balance between risk and return, thanks to the presence of cash flows since the acquisition and with a significant potential in terms of appreciation of value.
“Opportunistic” investments follow the same approach as “Value Add” ones do, but take a further step forward in terms of the risks assumed. “Opportunistic” investments require strong managerial work, and may include, by way of example, developments or real estate projects that require substantial restructuring or repositioning to fully realizing their potential. This type of investment offers the highest level of returns if the business plan is successfully implemented, but also involves taking on greater risks. The execution is paramount and the role of the manager is key for the value enhancement strategy. These transactions may recourse to a very high leverage but, due to the risk profile, they are often subject to less favorable debt conditions and it often happens that they are only financed through equity. If the business plan is successfully executed, the “Opportunistic” investments achieve a very high level of returns thanks to the appreciation of the value of the underlying asset and with a relatively short time horizon.
“Core”, “Value Add” and “Opportunistic” investments, given their complexity, require an active and constant managerial approach. Based on its knowledge of the real estate and credit market, Quinta analyzes, identifies and selects investment opportunities whose potential can be freed from the real estate, financial engineering and managerial skills of Quinta professionals, reducing their complexity and mitigating their risks, with the result of higher returns for the benefit of investors and equity partners.