All strategies work – until they don’t. While the hottest ticket in town is still private credit, is it everything it’s cracked up to be?
In Cliff Asness’ latest missive, a fictional asset allocator from the future looks back on the decade to 2035 to figure out which assets helped their performance and which hurt it.
Why this family office invests in music and mayhem
The largest single exposure in many family office portfolios is usually the asset their founders made their money from. But when the three founders of private markets powerhouse Partners Group launched their own family office, PG3, back in 2013, they gave it a mandate to invest only in highly unique, low-correlation asset classes.
For PG3 co-founder Urs Wietlisbach, Partners Group stock remains his largest personal holding. But PG3’s strategy has taken him far from the markets favoured by most family offices and the asset manager he helped start.
“We started off with insurance finance – natural catastrophe bonds and life runoff portfolios. We built a whole team,” Wietlisbach told The Inside Network’s Alternatives Symposium. “The next asset class we got was litigation finance – this is as low correlated as you can be. Either you win the case or you don’t. If you win you make money; if not, you lose money, and it has nothing to do with stock markets. And the third part was royalties – pharma royalties, music royalties, gas royalties.”
That paid off in 2022 when nearly everything else was falling but PG3’s three asset classes “all made money, and good money”, and PG3 now manages close to $3 billion, with Wietlisbach anticipating he’ll increase his own allocation to it from 15 per cent to 20 per cent.
“We always start all of the funds with our own money – usually several hundred million. As soon as we’ve proven that it works we open it up to friends and family, usually in Europe, usually close to our home in Switzerland. And we even have pension plans investing in the PG3 non-correlated portfolio.”
“If you think back, since 2013 we had the European credit crisis, we had COVID, we had the 2022 market drop and inflation going up. We never lost money. In every year we had a positive return; this is the beauty.”
Music royalties can be highly cashflow generative and can run for decades after a singer’s death – a fact that makes them better suited for evergreen funds where you “never have to sell unless prices are crazy” rather than the 10-year limited partnerships that were previously investing in them.
“Five years ago they didn’t make sense at all, because people overpaid for them and they were all in limited partnerships which finished after 10-12 years,” Wietlisbach said. “So they all needed to sell their portfolios and there was no market that paid what they wanted. We had music royalties at close to zero when we started the royalties fund and now we have a substantial allocation.”
Natural catastrophe reinsurance can also be highly idiosyncratic and is subject to annual repricing where investors can decide whether they want to renew their allocations.
“Earthquakes is a very strange industry. They reinsure it on a yearly basis and the premium is always completely different. I mean, earthquakes, the risk is pretty much the same. But every year these premiums go 3.5 times higher sometimes. Today we have a very high premium environment – three to four times higher premiums than you had four years ago. Four years ago we had almost no natural catastrophe, and now we have more. This is cyclical. Every year you see what premiums you get, and then you do it or you don’t do it.”
PG3 has since teamed up with Longreach Alternatives to offer its “highly differentiated” royalty opportunities fund to investors in Australia.
“PG3 was developed with a very specific objective in mind, which was to minimise if not eliminate principal capital impairment while generating double digit uncorrelated returns,” said Sam Edwards, partner at Longreach. “And they’ve had to be very innovative in creating those diversified portfolios in hard to access, hard to understand and challenging to research asset classes.”
“This is very difficult to do yourself. Even if you’re a large wealth management firm or a research house. Creating highly diversified portfolios across European insurance finance, legal litigation finance and cross-sector royalty finance is very difficult.”
