Alternative assets: Bricks and mortar woo Chile investors

Interest in alternative assets has grown apace in Chile.

The real estate segment – where assets are tangible and returns juicy – has played a leading role. The country’s private pension fund managers, or AFPs as they are known, are also getting in on the game as part of efforts to diversify their portfolios and boost returns for savers.

In the second quarter of last year, 24 investment funds were set up in Chile, accounting for US$292mn in assets, of which US$257mn corresponded to alternative assets, according to a report published by Chile’s asset manager association Acafi.

Over the three-month period, funds that invest in alternative assets – such as real estate, private debt, infrastructure and energy – grew 21.4%. And at the end of June, these funds held US$13.9bn of the overall US$32.7bn in assets under management. 

Against this backdrop, BNamericas spoke with Rodrigo Pinilla, corporate manager, investment, at local financial services company Nuevo Capital, to find out more. 

Nuevo Capital operates in the auto financing, operating leasing, insurance brokering and commodity exchange brokering spheres – and is due to enter the so-called Mutuaria Hipotecaria segment, part of the mortgage industry. 

This is the first of a two-part series of interviews with Nuevo Capital. The second, on the topic of insurance in Chile, will be published in March. 

BNamericas: Why have we seen, for some years now, an increase in interest in alternative assets on the part of institutional and high net worth investors?

Pinilla: To answer that question it's necessary to highlight that alternative assets have always existed, although not under the name of alternative assets but, rather, private financing contracts. At that time, these didn't have the requisite characteristics to form part of a public offer fund; they were not very liquid and were extremely limited. With the passage of time, and with the boom in the real estate sector and retail finance, structures were created to leverage these new businesses – which in the majority of cases corresponded to large residential and/or real estate projects – that required high levels of working capital and investment and, of course, the developers didn’t have the requisite capital to execute these.

Today, this type of private real estate debt is known as preferred equity, and it has become one of the most attractive alternative assets for investors who, normally, seek higher returns but also invest in tangible assets. Therefore, when one talks about growing interest, I believe this relates largely to the fact that the offer of this type of instrument has grown. Other market agents may consider that demand has also grown, but the truth is that this is not correct. This is largely because of what is known as “asset allocation,” which emerged as a consequence of recent financial problems such as the subprime crisis and the collapse of global stock markets. Investors have opted for projects that are more tangible and more closely linked to the real world.

In this sense investors, both Chilean and overseas, did not want a lot of sophisticated assets, among them structured notes or other derivative instruments, which ended up as junk or devalued.

And in Chile, which has a stable economy and a financial system that's quite well regulated and robust, these debt investment alternatives and other real estate assets were generated. These have proven appealing because of their rates, which are higher than that of any fixed income instrument on the market. 

On the other hand, institutional and high net worth investors had to obtain better and better returns [in relative terms] than those delivered by variable income and traditional fixed-income instruments, such as bonds or any financial intermediation instruments. In this sense, these new investors created these private debt funds, which facilitated steady growth in the market.

BNamericas: In general, have you noticed trends in terms of demand for, or interest in, any particular class of alternative asset?

Pinilla: Without doubt, alternative assets related to real estate funds are currently drawing the most interest. This is because they are tangible projects and deliver high returns on investment. In times of crisis it's common to hear about rises in unemployment and a reduction in production levels and national revenue. All this involves a reduction in hard assets and real estate, especially today when banks are being stricter in terms of granting mortgages.

As a result, these real estate funds end up being valued by investors. Many of these involve so-called multi-family projects – those large buildings that can hold a large number of rental properties. This is because the investors see the real estate project advance and perceive that their money is invested in concrete, real and tangible initiatives.

BNamericas: Do you think the segment will continue to develop?

Pinilla: Yes, without doubt. I believe the segment has become more sophisticated. In Chile, we can see that the AFPs are now investing in this type of alternative asset and, as a result, as they enter the market to participate in these mutual funds, the sector is automatically spurred and developed. At the same time, it will allow for a higher standard in terms of the creation and structuring of these alternative assets.

There’s no doubt that in a scenario of low interest rates in Chile and on a global level – and combined with relatively low inflation – the alternative asset could double, or even quadruple, a risk-free rate, which makes it attractive to any investor, whether institutional or sophisticated. 

BNamericas: Nuevo Capital has a commodity exchange brokerage and structures instruments based on alternative assets. What types of alternative assets are you focused on and how is this business area doing?

Pinilla: The commodity exchange brokerage is focused on factoring and trades with institutional investors, such as general fund administrators, which have as underlying assets private debt funds, which hold multiple instruments such as invoices and auto loans. There are some administrators that have gone beyond structuring individual debt funds that have as their underlying asset one of private car investments, invoices, guarantee funds, social security institutions, among other instruments. 

In this sense, Nuevo Capital has auto loans and factoring. In the latter line of business, we're the biggest intermediary of invoices in the over-the-counter market of the commodity exchange. This means that we have around 13 institutional investors that are continually investing in this type of instrument. Now we're entering the mortgage business and we want to act as a mortgage loan intermediary, something we hope to achieve this half. It should be noted that we already have our own auto debt fund.

BNamericas: Last year the government reformed the law that governs the commodity exchange. A key objective of the bill was to help SMEs and new companies obtain financing at favorable rates. What’s your view on these changes?

Pinilla: Many years ago, the commodity exchange stopped being geared to the farming sector. Today it is more focused on loan and debt instruments. With the change in the law, alternative asset debt instruments such as auto loans, leasing arrangements and invoice titles can be traded – there is also the possibility to trade consumer loans. This is going to constitute a large market maker to create debt funds, which will help support SMEs.

Currently, a bank doesn't need a debt fund as it's financed via its savers. And it establishes its lending policies based on a series of restrictions, of its own shareholders as well as of the market or international organizations. In the new provisions policies under Basel III [which Chile is adopting] for financial institutions in the country, the flow of funds to SMEs is effectively hampered since – because of their characteristics – they cannot obtain financing.

In this sphere, the commodity exchange, by regulating and dematerializing all these debt instruments, will create a situation where large institutional investors can, through factoring, leasing and auto and consumer loans, invest their funds in a more diversified manner and transfer this cheap cost of funding to an SME or microenterprise which, because of various factors, cannot finance a truck, a small fleet or working capital. This is very important in that the government is creating a space for large funds to reach Chile’s micro and small enterprises.

BNamericas: Finally, what’s new at Nuevo Capital?  

Pinilla: At the end of last year, we launched our auto credit fund amid the crisis, achieving a reclassification of ‘A-’. This helped us to consolidate and, again, set a precedent in the market, since little liquidity in this instrument existed.

We expect to make this fund grow, to continue spurring our invoicing intermediation business with large institutional investors and to make an impact on the mortgage business [Mutuaria Hipotecaria in Spanish, where a life insurer, via a company like Nuevo Capital, invests in mortgages as part of its annuity operations], which is highly attractive to insurance companies. With this we should have diverse debt instruments in our portfolio, permitting us to have greater options regarding terms, variety of clients, underlying contracts and greater diversification. Having all these business lines is very important to us and positions us as one of the country’s biggest non-bank financial groups. 

Funds continue to trust in the expertise of Nuevo Capital. Indeed, last year, in the area of investments alone, the refinancing and movement of more than 545bn pesos [US$672mn] in capital was achieved, which reflects the confidence the market has in our company. We expect to now start growing in other countries in the region.