Expert explains: This is how you will proceed with alternative investments in the markets

Two things characterize us in the investment aspect: the first is a global orientation, since our portfolios have always been more international, not concentrated in the local-Israeli market; And the second is the significant place that private investments occupy with us – what is also known as “alternative investments”. This is what Eran Peleg, chief strategist at Clarity Capital, an investment management company that provides capital management and investment services to private and institutional investors in Israel and around the world, says.

“In the last year or two, the issue of alternative investments has gained more resonance, but it is an area that we have been dealing with for many years, and it is a significant part of the portfolios we manage,” Peleg explains.

“Financial markets are volatile and have recently suffered from excessive instability, even before the war broke out in Ukraine, against the background of high inflation and expectations of interest rate hikes. The war has only exacerbated the situation. That is why it is important to emphasize other places to invest During this period, it is especially worthwhile to focus on alternative investments, because it is difficult to know what will happen tomorrow morning and where the market is going.

“Alternative investments have always been a significant part of us,” Peleg emphasizes. “The best way to define an alternative or private investment is to claim that it is in fact anything that is not bonds, stocks or cash, which are the tradable parts of the portfolio. This can include investments in real estate, infrastructure, private debt or shares of private companies (so-called ‘private equity’) – these are long-term investments. What characterizes these investments is that they are neither liquid nor tradable. Some investments allow the investor to exit one For a period, and there are those in which you are closed for five or seven years. “

“Indeed, the entry ticket for these investments is relatively high and not always suitable for every investor, because a significant amount is needed. This is a market that was previously intended mainly for institutional investors, and in recent years there are more options for private investors to enter, but the amounts are higher. To know all these details before we get into it. “

International experience
Clarity Capital (formerly KCPS) was founded in 2006 by Tal Keinan, David Steinhardt and Jay Pomerantz with offices in New York and Tel Aviv. The company is overseen by the Israel Securities Authority, the U.S. Securities and Exchange Commission and the authorities of Ontario and Quebec in Canada, and currently focuses primarily on private equity management and family office services.

The company’s partners have a rich financial background and most have worked abroad, such as Peleg, who holds a master’s degree in business administration from Oxford University, and was previously a senior investment manager at Gartmore in London and head of international investment at Gmulot (Bank Bank Hapoalim).

“It communicates our global orientation,” Peleg says. “The people here have experience in international markets and top-notch financial entities, who know how to provide investment management services, especially to wealthy individuals and families, in Israel and the United States, as well as to organizations, philanthropic funds, trusts and other entities.”

Clarity Capital has previously managed several alternative investment funds, the best known of which is the KCPS leveraged fund, which it has run for about a decade, after the company won a tender in 2009 on behalf of the state to manage the fund worth NIS 1.2 billion. About two years ago, the company won another state tender – for the establishment of an investment fund in cooperation with the Inter-American Development Bank, which will invest in debt for infrastructure projects in Central and South America.

“One of our advantages is that we only work with large clients. We are not a retail investment house, so in the first place the size of the portfolios allows for this type of investment,” says Peleg. “Another advantage is that thanks to the long-standing relationships we have developed with the entities that manage the funds and investments, we can allow our investors to come in with much smaller amounts.

A tradable investment can be invested through a bank account or brokerage, and I buy any stock or bond I want at the click of a button. But in alternative investments, we need to know the entities operating and know who to talk to – and even then we need to deal with the issue of the minimum investment amount, which is something we solve.

Peleg emphasizes the benefits of alternative investment compared to other channels. “The bond market has been tough for some time,” he explains. “In 2021, global bond indices were negative, as they were this year, but if you invested in private debt, which is also an alternative investment – you could achieve positive returns at a similar level of risk.”

“We have invested in a fund run by a large American entity that gives loans against US real estate, such as its first mortgage on real estate and large commercial properties. I have a first lien on the property, and if the property owner does not pay the interest and repay the loan, I take the property from him. This is a defensive investment. “There may be a situation where real estate prices go down, but they have to go down a lot so that my loan is not covered. The point is that in alternative investments I have the ability to produce a relatively stable return and be less dependent on the tradable market.”

“It is true that if you invest, for example, in a venture capital fund, the ability of portfolio companies to make an exit ultimately depends on the tradable market,” he adds. “In the case of alternative investments the tradable market still affects returns, but it does not affect from today to tomorrow. In this case, what matters is what the market will look like in about seven years, when those companies reach maturity. I do not need the market right now, I need the market in “5-10 years for the investments I make. Such investments allow me to spread the portfolio to investments outside the capital market, and are less dependent on the weekly or monthly fluctuations.”

Solar energy in Israel (Photo: Reuters)

Infrastructure and renewable energies
According to Peleg, one of the hot topics currently in the alternative investment market is infrastructure, an area that is gaining momentum in many countries in Europe and the US. Clarity Capital is very active in this area as well, and operates with a large fund that invests in US infrastructure. “This is a long-term fund with a medium risk, and it can produce a double-digit return,” Peleg explains.

“Following the Corona crisis, the U.S. administration came out with a plan to invest in infrastructure. The goal is to increase government spending to support the economy and also to improve infrastructure, which requires improvement after years of neglect. “In the past, when people talked about infrastructure, they mainly meant roads and interchanges, but today infrastructure is also communication lines, data centers, cyber protection and the like.”

“Investments in renewable energy are also considered investment in infrastructure,” Peleg emphasizes. “Apart from the issue of the climate crisis, the geopolitical aspect has also risen recently: because of the Russian war in Ukraine, oil and natural gas prices have skyrocketed. Russia is holding Europe by the neck because of its dependence on Russian energy. Of the renewable energies. “

According to him, venture capital investments are also in focus: “More and more venture capital funds today specialize in specific sectors. We, for example, have invested in a fund that focuses on fintech, financial technology. It is an interesting field with dramatic developments. They began to realize that this was endangering their status – which led them to decide to become more involved in the activity, so that they could control the process.

This field is broad, and includes advanced payment systems technologies, financial security, digital and blockchain currencies, insurance and a wide range of other topics. We also invested in a fund that deals with media tech, technology in the media and communications industry. Quite a few successful companies in this field have left Israel. It’s a branch that is flourishing here. “

Peleg emphasizes the benefits of alternative, private investments, especially in light of the fluctuations in the global economy in recent times. “At any given moment things are changing drastically. Even before the war between Russia and Ukraine they entered a challenging market environment. It started last year when we started to see inflation climb. Much of it has to do with the corona plague, supply chain problems and labor market changes.”

“It is important to remember that many things have changed as a result of the corona, such as increased government spending. Israel, the United States and other countries have run very large deficits, the labor market has changed drastically, the United States has had a large wave of layoffs. And want to work from home or in a hybrid way. “

“Following the rise in inflation, central banks have been forced to make a significant change in monetary policy,” Peleg adds. “In previous years they were busy lowering interest rates to inject liquidity into the markets, and suddenly they had to change direction. Expectations for raising interest rates, which began to climb in mid-2021, began to affect the prices of financial assets.

Because of the marketability of the capital market and the immediate adjustment of the prices of assets traded to the emerging reality, the damage there is most pronounced. This is the challenging environment we are in today. “It is necessary to raise interest rates to fight inflation, but there are fears that growth is not strong enough to withstand it – so a balance is needed here.”

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