Decoding the Alternatives Toolkit: Tailwinds for Real Assets
As public markets contract and institutional capital flows increasingly toward private opportunities, sophisticated investors are seeking ways to diversify beyond traditional stocks and bonds.
Real assets, comprising real estate and infrastructure, represent a compelling asset class within private investments that offers unique benefits in today's economic landscape.
With secular tailwinds, including a shifting rate environment and accelerating AI adoption creating unprecedented demand for infrastructure, real assets present attractive investment opportunities for qualified investors willing to navigate their complexity.
What Are Real Assets?
Real assets distinguish themselves from financial assets through their tangible, physical nature, which provides several inherent advantages that become particularly valuable in uncertain market conditions. These include the following:
- Low correlation benefits
- Dual return streams and stability
- Built-in inflation protection
- Tax efficiency advantages
- Commodity-like scarcity profiles
Low Correlation Benefits
Real assets have the least correlation to publicly traded stocks, bonds, and other traditional asset classes. This low correlation stems from their tangible nature and reduced susceptibility to short-term market volatility that often drives public market pricing. Unlike securities that can experience dramatic price swings based on market sentiment, real assets derive their value from fundamental factors like:
- Location
- Utility
- Cash-generating capacity
Dual Return Streams and Stability
Returns from real assets come through a powerful combination of price appreciation of the underlying asset and contractual cash flows from end users or tenants. This dual return structure creates lower volatility compared to assets dependent on a single return mechanism.
For example, a well-located office building generates steady rental income while potentially appreciating in value over time, providing investors with both current income and long-term capital appreciation potential.
Built-in Inflation Protection
Real assets serve as natural inflation hedges through both contractual and economic mechanisms. Real estate leases often include escalation clauses tied to inflation indices, while infrastructure assets typically have rate-setting mechanisms that adjust with rising costs.
This inherent ability to increase prices, cash flows, or rates as inflation rises helps protect returns from inflationary erosion—a significant risk for fixed-income investments and even some equities.
Tax Efficiency Advantages
The physical nature of real assets enables significant tax benefits through depreciation deductions over time. These depreciation benefits can substantially reduce the effective tax rate on distributions, creating a greater compounding effect for investors.
Additionally, real estate investments offer access to specialized tax strategies that provide flexibility for tax deferral and estate planning, including the following:
Commodity-like Scarcity Profile
Real assets possess inherent scarcity characteristics similar to commodities. Land availability is finite, building permits are limited by regulation, and infrastructure assets often enjoy contractual or legal monopolies in providing essential services. This scarcity creates barriers to entry and supports long-term value appreciation as demand grows while supply remains constrained.
Accessing Real Assets Through Private Markets
While investors can gain exposure to real assets through publicly traded real estate investment trusts (REITs) and infrastructure companies, private market access offers several compelling advantages that more closely align with the fundamental characteristics that make real assets attractive.
True Asset Performance vs. Market Correlation
Direct ownership through private investments provides exposure to genuine real asset performance and behavior. Public market REITs and infrastructure companies tend to trade in correlation with broader stock market movements rather than reflecting the fundamental performance of their underlying assets.
This correlation becomes particularly pronounced during periods of market stress, when public real asset securities may sell off alongside other equities despite stable underlying asset performance.
Enhanced Tax Efficiency
Private real asset funds often provide superior tax efficiency compared to public alternatives. The pass-through structure of many private funds, combined with depreciation benefits and the ability to implement tax-efficient strategies at the fund level, can result in more favorable after-tax returns for investors.
Access to True Infrastructure Investments
Many infrastructure investments simply cannot be accessed through public markets. Essential infrastructure assets like toll roads, utilities, airports, and energy transmission systems either don't exist in publicly traded form or lose their pure infrastructure characteristics when packaged as public securities.
Private markets provide the only avenue for investors to access these assets in their pure form, capturing the full diversification and return benefits that infrastructure can provide.
Expertise and Operational Management
Real estate and infrastructure assets require significant specialized expertise to acquire, own, and operate effectively. This expertise requirement is particularly acute for infrastructure given the unique nature of these assets and their ongoing operational complexity.
Private investment managers bring this specialized knowledge, allowing individual investors to access opportunities that would be difficult or impossible to pursue independently.
Evolving Investment Landscape
Infrastructure investments represent a relatively new asset class for retail and ultra-high-net-worth investors. Historically, municipalities and government agencies took on most infrastructure projects, but we're witnessing a significant expansion of public-private partnerships and private investment opportunities as demand grows and governments seek private capital to fund essential infrastructure needs.
Current Market Opportunities and Secular Tailwinds
The convergence of several powerful trends is creating compelling investment opportunities across real asset sectors, with some of the most attractive opportunities emerging from fundamental economic and technological shifts.
Real Estate Market Repricing
The commercial real estate market experienced significant repricing following the interest rate spike in 2022, creating attractive entry points for discerning investors. While office space challenges drove down commercial real estate pricing broadly, office space represents only a small fraction of total commercial real estate.
This broad-based repricing has created opportunities across sectors that aren't facing the structural headwinds affecting traditional office space.
Demographic-Driven Opportunities
Shifting population demographics are creating tailwinds across multiple real estate sectors. An aging population is driving demand for medical real estate and senior living facilities, while changing educational patterns support student housing investments.
The continued growth of e-commerce is fueling demand for industrial and logistics real estate, particularly in markets experiencing population growth and undersupply.
Housing Supply Constraints
The United States faces a significant housing undersupply situation that has created a structural floor under existing housing assets. Regulatory constraints, permitting delays, and construction challenges mean new supply cannot quickly respond to demand, supporting values for existing housing stock and rental properties.
Infrastructure and Energy Transformation
Current power and energy demand already exceeds our existing supply capacity, and this gap is widening rapidly. The AI revolution and increasing compute power needs are accelerating energy demand at a meteoric pace. This creates substantial opportunities across various power generation, transmission, and distribution infrastructure investments.
Government and private sector infrastructure spending commitments are reaching into the trillions of dollars, with forecasted needs far exceeding current planned expenditures. This suggests we may be in the early stages of an infrastructure and energy investment super cycle, driven by both technological advancement and the need to modernize aging infrastructure systems.
Navigating Complexity: The Importance of Professional Guidance
Real assets offer compelling opportunities, but successfully investing in this complex asset class requires careful navigation of unique considerations including illiquidity, manager selection, and understanding market cycles.
Manager Selection Is Critical
The complexity and specialized nature of real asset investments make high-quality manager selection imperative. Performance disparities between seemingly similar strategies can be substantial, making due diligence and manager evaluation crucial for success. Access to institutional-quality investment managers with proven track records and specialized expertise is essential.
Strategic Wealth Planning Partnership
An experienced advisory team serves as a critical strategic wealth planning partner, providing market access, rigorous due diligence processes, and disciplined investment approaches essential for effectively identifying value and assessing risks across private markets.
This partnership ultimately helps investors make informed decisions as they pursue both traditional and alternative investment opportunities. Real asset investments should be carefully integrated into broader wealth planning strategies, considering factors like liquidity needs, tax implications, portfolio diversification objectives, and suitability requirements.
Given the complexity of this asset class, consulting with a qualified financial advisory team is essential to help properly allocate capital and navigate the various opportunities and risks inherent in real asset investing.
As the private market opportunity set continues to expand and secular trends create new investment themes, real assets represent an increasingly important component of diversified investment portfolios.
However, the complexity and specialized nature of these investments make professional guidance essential for investors seeking to explore these opportunities while managing associated risks.
We’re Here to Help
To learn more about real assets and potential private market investment opportunities, contact your wealth management professional.