Market volatility creates opportunities for secondary buyers: Stafford

Equity and bond portfolios' shrinking assets are major challenges currently faced by global investors in terms of asset allocation. But the situation presents an opportunity for alternative investment managers, said Ingo Marten, managing partner of real assets at London-headquartered Stafford Capital Partners.

More limited partners are having to sell alternative assets now due to the "denominator effect," which means the proportion of some assets drastically increases while the proportion of others reduces due to decreased valuations. In a bid to avoid blind pool fund risk and pursue steady cash flow, Stafford is looking to secondary transactions as well as brownfield and timberland, Marten said. 

Marten has more than 25 years of investment experience in asset classes such as infrastructure secondaries, timberland and sustainable private equity. Marten was also instrumental in establishing Stafford’s first Asian office in Korea in 2017.

Marten visited Korea for a week from Nov. 17 to share investment ideas with local clients and prospects, focusing on the latest investment trends in sustainability considerations, particularly carbon, as part of portfolio construction and allocation planning. He also met various service providers to discuss opportunities with Korean partners on the next products Stafford will bring to market. William Greene, Stafford’s managing partner of infrastructure, also joined the meetings.

The following is our interview with Marten via e-mail.

▲ How did Stafford develop during COVID-19?

"Stafford’s activities continued on both the fundraising as well as the investment side. For example, we raised Stafford's largest fund ever during the pandemic, such as the €731 million fourth infrastructure fund, while at the same time swiftly deploying capital in infrastructure and timberland so that these funds are reaching the 75% invested capital mark less than two years after their respective final closings.

We have achieved such goals thanks to all the remote-working capabilities put in place before the lockdowns. In addition, it was much easier to provide services remotely rather than to produce and ship physical products."

▲ What are your views on the global investment environment with high inflation and rate hikes in 2023? And what would you suggest regarding institutional investors' asset allocations? 

"First of all, I have heard the concerns about inflation and rates not just here in Korea but effectively everywhere, in Asia, Australia, North America and Europe. With interest and inflation rising, geopolitical instability, and price shocks in sectors like energy and transportation, I agree that this is a very difficult and volatile environment for asset allocators to manage their portfolios.

We should also keep in mind that many of the young investment professionals in charge of investment decisions don’t necessarily have full 'over-the-cycle' experience given how very long interest rates were close to zero.

Stafford’s approach to generating attractive returns for our investors independent of the world’s position in the economic cycle remains the same. We focus on concrete assets and avoid blind-pool risk by pursuing secondary transactions to assess and underwrite concrete, inflation-protected cash flows from brownfield assets rather than opportunities from future greenfield pipelines.

Take our infrastructure secondaries fund series as an example. We also see attractive, protected but yielding investment opportunities in timberland secondaries, as timberland is largely decorrelated from equities and other asset classes.

And let’s not forget that a market environment with increased volatility also provides additional opportunities for secondary buyers like Stafford. We see an increasing number of investors who approach us intending to sell parts of their alternative investment allocation to address the so-called 'denominator effect': Their allocations became too large on a relative basis due to shrinking valuations on their equity and bond books so that they have to reduce the alternative investment allocations accordingly. This is where Stafford’s track record in transaction speed and deal execution makes a difference."

▲ Stafford is known for its strong credentials concerning sustainability driven investments. But many Korean investors had mixed experiences when investing in early socially responsible investment (SRI) funds. What is your recommendation on how to make investments supporting sustainability goals while delivering stability and performance?

"This is a broad and diverse topic and I sometimes have the impression that there is substantial confusion in the market about the various terms used for sustainability related investment activities.

The starting point for Stafford is that we committed early to the Principles of Responsible Investing (PRI). PRI calls for the systematic integration of environmental, social and governance aspects into the investment process, which we have done and is considered in every investment decision that we take. In addition, we have committed to the Net Zero Asset Managers initiative with a particular focus on contributing to decarbonizing our portfolios as well as those of our investors.

However, we aren’t a dedicated impact fund that would accept lower returns for investors to achieve impact goals. To give you an example, we are for many years working successfully together with an Australian Superannuation Fund on direct private equity secondaries and co-investments in companies that have a certain angle on providing climate solutions.

This Direct Access Program – as we call it – allows the investor to participate in investment opportunities from sustainability driven transitions in areas such as energy, energy and material efficiency, digitalization and so on. The managed account shows a very attractive performance, and my suggestion is that it is important to be specific and concrete when it comes to discussing opportunities and risks in sustainability driven investments."

▲ Stafford’s Carbon Offset Opportunities Fund has recently received anchor investment from the UK’s Essex Pension Fund. Would you explain why European or UK pension funds are committing to carbon credit and other sustainability driven funds?

"Following the logic from before, we’ve entered into discussions with local government pension schemes in the UK about their commitments to net zero and the decarbonization of their investment portfolios. Considering that UK regulations are advanced in requesting reports on the efforts taken concerning such net zero and decarbonization goals of pension funds, I am also expecting such requests from regulators in other jurisdictions to increase soon.

The priority in reducing carbon from the atmosphere is obviously avoidance so institutional investors should push the companies they have in their portfolio to use renewable energy and apply all efficiency technologies available to reduce their carbon emissions.

However, to achieve net zero, institutional investors have to go further and actively take carbon out of the atmosphere and decarbonize their respective portfolios. There are technologies available that take CO₂ out of the air and sink it into the ground. They are called Direct Air Capture with Cabon Storage (DACCS).

However, DACCS has not been operated at a large scale and remains expensive for the moment with approximately USD 800 per tonne of CO₂ captured. If you compare this with an actively managed forest optimized for carbon storage, you will appreciate that we have managed forests on a large scale for many years and the respective cost of storing a ton of CO₂ in a tree is approximately $10 per ton of CO₂.

This is why the Essex Pension Fund has committed to Stafford’s carbon fund and they will be joined by many more. The generated voluntary carbon credits may appreciate over time as demand is increasing; in addition, investors receive a stable cash yield from forest operations while the trees grow by storing carbon."

Stafford is an independent private markets investment and advisory firm with $7.5 billion in assets under management and advises more than 170 institutional clients worldwide. 

It has a global team of more than 80 professionals investing in timberland, infrastructure, agriculture & food, and sustainable private equity and private credit.

Stafford has been a UN PRI signatory since 2010 and has committed to the Net Zero Asset Managers initiative. It puts sustainability at the center of its investment process and implements a well-defined ESG program across all strategies.

Write to Jihyun Kim at snowy@hankyung.com
Jennifer Nicholson-Breen edited this article.