Despite the benefits of alternative investments, their penetration in investment portfolios of regular investors remains disappointingly low, for reasons we will come to.
Alternative assets have been proven to drive growth in portfolios, serve as protection against inflation, and act as a hedge against volatility in public markets.
However, retail investors have invested only a fraction of their assets in alternatives. According to research by KKR, ultra-wealthy families had invested three times more into alternatives than affluent mass investors and ten times more than retail investors.
Examples of alternative assets include private debt and equity, hedge funds, managed futures, art and antiques, commodities, and derivatives.
In Singapore, access to private debt, which offers exposure to the booming buy now pay later (BNPL) segment, is creating an exciting proposition for institutional and accredited investors.
The hope is that in the not-too-distant future, regular investors will be able to more easily access alternative investments through homegrown fintech platforms that tout the mission of democratising finance.
The reality is that individual investors today still face intense challenges in accessing alternative assets: it remains very much an insider’s game where opaque asset valuations reign, elitist groups of experts form opinions, and access is limited to high minimal entry tickets.
Investment in buy now pay later debt
The rise of BNPL has created a booming market for SMEs and consumer debt that is remarkably low-risk when pooled together while also offering investors attractive yields.
While every investor in Singapore is likely aware of the growth of BNPL (it’s hard not to see these payment options in most high street stores today), many are probably unaware that it’s already being added to portfolios of credit funds and wealthy clients as private debt.
Public equity markets in the US and elsewhere are near all-time highs. The Federal Reserve is expected to begin reducing its balance sheet (i.e. selling the assets it bought to support markets during the pandemic) and raising interest rates to nearly three per cent by the end of the year.
Also Read: The next fintech innovation will be a customer-led phenomenon
This monetary policy, which will spill over to markets in Asia, means that the primary investment class retail investors have access to (i.e. public equities) will likely be repriced with lower multiples.
For regular investors who have most of their net worth in public equities and bonds without any alternatives, this could mean they see a fall in the value of their portfolios over the coming months and even years.
However, with Asia’s growing private debt from areas like the BNPL boom still providing high yields of around 10 per cent per year and low volatility, it offers high-net-worth investors a way to diversify and hedge their portfolios against declines in public markets.
Addressing Singapore’s wealth inequality
High on the agenda of the Singapore government, as made clear in its recent Budget 2022, is to address the growing financial inequality of the population while at the same time continuing to support innovation and new technologies.
Fintech is a segment that the city-state is known to be a regional and global leader in, so it makes sense that it is the fintech start-ups and innovators who contribute toward solving domestic inequality.
As mentioned, alternative assets are not easy to access for the regular investor, so while they represent a possible solution to rising inequality in Singapore, the question of access first needs to be tackled.
This is precisely where fintech platforms can play a role: conditional on support from the regulator, a new breed of alternative investment platforms are emerging that give investors exposure to alternative investments with as little as US$100 starting investment.
This will be a game-changer for Singapore and the whole world if it is delivered in a safe, regulated way combined with greater financial education and rising levels of financial literacy.
Just as today, there are online comparison platforms for consumer financial products like credit cards, personal loans, insurance, and mortgages. One day soon, fintech companies may offer greater transparency and access to comparisons of alternative investment platforms for the regular investor.
With the right public-private sector investment and effort, we can bring down the stark contrast between the alternative investment holdings of the regular versus an accredited investor.
That’s a noble mission for Singapore’s fintech and one I hope to be a part of it.
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