Openfinance Insights

Asset Focus: Real Assets

Posted by Juan Hernandez on Dec 16, 2019 11:18:32 AM
Juan Hernandez
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Asset Focus: Real AssetsFrom oil and gas reserves to precious metals, real assets represent a broad range of investments – and a wealth of opportunities for investors.

This diverse category of assets, including commodities, infrastructure, natural resources, energy and more, is a cornerstone of many well-diversified portfolios. Real assets tend to move independently from the stock market and be less volatile than equities, offering the potential for stability during market swings. In addition to providing diversification, real assets can also help investors protect themselves from inflation over the long term.

Despite these advantages, though, the sector’s value has remained significantly less accessible to everyday investors over the years in the private markets. Most investors never even hear about the latest oil and gas fund or promising infrastructure deal, excluding them from opportunities to diversify their holdings and gain long-term capital appreciation. For companies that issue these assets, the inability to reach investors beyond their own narrow networks can also make it more difficult to raise capital and maximize valuations.

Those challenges are one of the driving forces behind the rise of digital securities. As a digital representation of an investment in an asset such as a natural resource, private equity or venture capital, digital securities are connecting investors and issuers in new ways and bringing long-overdue liquidity to the real assets market.

Real Assets, Real Advantages

Investor interest is growing in real assets, with the North American infrastructure and natural resources markets climbing in 2018 by 22% and 8%, respectively, according to McKinsey. Recent years have also seen the rise of megafunds of $5 billion or more, with eight of these infrastructure megafunds raising more than $68 billion collectively since 2013. In total, real assets under management in the private markets reached $1.6 trillion in 2018 (including real estate), McKinsey reports.

That growth could be just a prelude to the market’s full potential, however. Real assets have been difficult for investors to access for a number of reasons, including:

  • Large offering sizes that can top out at $10,000 or more, barring all but the wealthiest investors
  • High storage and ownership costs for gold, silver or other physical assets
  • Long lockup periods and a virtually non-existent secondary market, making it all but impossible to transfer holdings

These realities have also had an impact on issuers, limiting who they can reach and how much they can potentially raise through their offerings. As digitization comes to the alternative assets industry, digital securities could be the key to unlocking the true value of these assets.

Why Real Assets Are Going Digital

With the digital securities market poised to reach an estimated $19 billion by 2022, investors will likely have an expanding and diverse set of opportunities to choose from in the coming years. Real assets represent an important part of that mix, with several companies in the sector already exploring digitization.

High-profile examples include Blue Hill Mining, which announced plans to issue digital securities backed by copper, nickel, cobalt and gold reserves in Mongolia earlier this year. Digital securities have excited energy companies, too, with several E&P companies expressing interest in digitizing oil and gas reserves.

The physical nature of real assets makes them particularly well-suited for digitization. Unlike holdings whose value is based on intellectual property or other intangible factors, real assets are assets that investors can see and touch, making it easier to understand what they’re buying. Digital securities also offer lower offering minimums, the opportunity to purchase assets without taking physical possession, and quick and seamless transfer in the secondary market. This new model removes many of the historical barriers to the private market, making it more practical for both accredited and non-accredited investors worldwide to participate and offering advantages to issuers as well. With opportunities growing across the real assets market, digital securities can help put them in reach for more people.

 

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