Alternative Asset Trust Quarterly Report: September 30, 2014
The MacNicol Alternative Asset Trust is a multi-strategy, alternative investment platform designed to generate positive and uncorrelated returns against the public stock and bond markets. The Trust, through its underlying limited partnerships (see Chart 1 below), is invested in private real estate and mortgages, private equity, high yield bonds and multi-strategy hedge funds. Combined, the Alternative Trust is invested in more than 100 separate real estate projects, mortgages, hedge funds and private securities.
Chart 1 – Investment Structure MacNicol Alternative Trust
Alternative Trust Performance Review: The goals of the Alternative Trust are to generate positive “real” returns (after-taxes and inflation) each year, and to generate annualized nominal returns of 6%-8% over rolling five-year periods. We are pleased to report that as of September 30th, 2014 the Trust has met its primary goals by generating positive calendar-year returns that have exceeded inflation, while delivering an internal rate of return of 7.5% per annum from inception.
Third Quarter Highlights:
During the third quarter of 2014 ending September 30, the Alternative Trust increased in value by 2.7%. For the past 12 months, the Trust returned 12.3% driven by strong performances in private equity, real estate and hedge funds.
Looking forward, we are anticipating an acceleration of performance from the Trust’s private equity holdings (see Emergence Fund commentary, page 4) and continued steady results from the Trust’s real estate holdings and hedge funds.
North American Private Real Estate
The Alternative Asset Trust invests in North American private real estate through its MacNicol 360 Degree Realty Income Fund holdings. The “360 Fund” is a private real estate fund focussing on value-added projects in the United States and Canada. The Fund invests in real estate projects and mortgage funds through an expanding number of carefully selected operators and sponsors. These partners are chosen for their high degree of local knowledge and experience in deal sourcing, finance, construction, and property management.
Through its partners, the Trust has exposure to more than 100 separate real estate projects and six asset classes across North America. The chart below highlights the regions of North America in which our real estate projects are located. The overall strategy is to invest in the fastest growing regions of the United States including Texas, Florida, Georgia, Phoenix, Las Vegas and California.
For the third quarter of 2014, the 360 Degree Fund gained 1.0% in USD terms and 6.2% in Canadian dollar terms reflecting the strong upward move in the US dollar during the quarter. For the past 12 months, the 360 Fund is ahead by 4.5% in USD terms and 12.9% in Canadian dollar terms. The $USD gains were a combination of an increase in the valuations of our multifamily portfolio managed by the Carroll Organization of Atlanta along with gains in the Fund’s US office exposure through its investment in the Rockwood IX Fund.
Real Estate Portfolio Activity
During the quarter, the 360 Fund made additional investments into JCR Fund II and JCR Fund III of Denver CO. JCR specializes in restructuring “middle-market” commercial mortgage loans which are loans valued between $5 million and $20 million in size. Many of these loans were originated during the 2002-2007 real estate boom and the maturing mortgages are above the value of the underlying buildings. In these cases, JCR’s goal is to purchase the mortgages at a discount from the lenders and to then work with the owners to restructure the mortgage and to maximize the value of the buildings for an exit sale. Also during the quarter, the 360 Fund’s investment in a private mortgage REIT (UDF IV of Dallas), went public in the US. We continue to hold the asset as it currently is yielding almost 8.0% and we are happy to continue to collect these distributions.
During the third quarter the 360 Fund also invested into a regional mall complex in Jacksonville Florida named “Crossroads”. This mall is 100% leased with strong tenants including Floor and Décor and Dollar General and is located in a prosperous and growing area of Jacksonville. The property was purchased at a 10% capitalization rate and will support a 12% annual distribution with modest leverage.
Canada Real Estate Outlook and Investments
Our core Canadian real estate investment continues to be with KingSett Capital of Toronto. The KingSett portfolio is comprised of more than 50 Class A and Class B office, multifamily, retail and industrial properties across Canada. These properties include the Bayshore Shopping Centre in Ottawa, 130 Bloor Street West retail/condominium complexes in Toronto and the Cherry Hill apartments in London,
Ontario. KingSett management, led by Jon Love, are disciplined capital allocators and are adept at incremental improvements leading to above inflation rental gains in their properties. Outside of this investment, we continue to believe that the risk/return for US real estate is superior to most of what we see in Canada especially in multifamily, distressed mortgages and Class B office space in gateway cities.
Private Equity – MacNicol Emergence Fund:
The investment objective of the Emergence Fund is to generate capital gains and income by investing in a portfolio of privately-held companies and private equity funds. The Fund seeks opportunities where capital exit strategies are clearly defined, and are likely to occur within a 3-5 year time frame. The Emergence Fund invests in established private equity funds and directly in private companies with defensible franchises, high growth profiles and proven management. Investments will largely focus on profitable companies with high levels of proprietary technology addressing large target markets.
The Emergence Fund is invested in three primary end markets: Agriculture, Finance and Data Analytics. In agriculture, the Emergence Fund owns farmland in Brazil and Uruguay both of which have increased in value this year as the world’s population continues to grow and demand for food increases. The vast majority of our technology investments are in late-stage, revenue generating data- analytics companies through our investment in the Georgian Partners Fund I and Georgian Partners Fund II of Toronto.
The 10 companies in the Georgian I portfolio grew revenues by more than 35% on average during 2014, and are well positioned to take advantage of global enterprise software and security trends including cloud storage management, electronic signature software, on-line retail, mobile computing and the growth of smart phone applications.
In 2014/2015, we are looking forward to a possible initial public offering of shares of Shopify of Ottawa, which is the largest holding in the Georgian Partner’s Fund I. Shopify is one of the fastest growing ecommerce companies in the world and is well supported with shareholders including Georgian, Insight Capital of New York and OMERS pension fund of Toronto. Shopify’s core business handles all of the back-end administration for on-line and conventional retailers from web site creation and design, to shipping and billing. This service is extremely compelling with price points starting from as low as $50 per month. Shopify currently has more than 120,000 clients on its platform and has been growing that total by more than 80% per year. The size of the global on-line ecommerce market is enormous and growing by more than 20% per annum, meaning that Shopify has a very long “runway” of high growth ahead. A good comparison in terms of potential is the Chinese ecommerce and online retailing giant, Alibaba which recently went public with a valuation of 23X trailing revenues.
The Emergence Fund is also invested in technology growth companies through an investment in a US-based fund (Multiplier Capital) that specializes in providing convertible debt loans to private companies. This strategy is highly lucrative with less risk than conventional private equity investing because of the senior position of its loans. Multiplier is currently paying a 10% annual distribution and its portfolio is performing extremely well across the board.
Hedge Funds – Absolute Return Fund
The investment objective of the Absolute Return Fund is to generate positive returns under most market and economic conditions, and to have little or no correlation to the US and Canadian stock markets. In order to achieve its objectives, the Absolute Return Fund invests in several value-added strategies managed by experienced and successful Canadian, US and U.K. hedge fund managers. Most of these investments are not available in the public market and are typically not accessible to individuals and smaller institutions because of high minimum investment thresholds, often in excess of five-million dollars. For all of 2013, the Absolute Return Fund gained 12.0% which was significantly above its benchmark. The Absolute Return Fund has continued to perform well with this year with a 7.7% return through the first nine months of 2014. Investment returns within the portfolio were broad based in 2013 and so far in 2014, with particularly strong performances from the Fund’s investments in the Contrarian Emerging Market Fund of Connecticut and the Milford Income Fund of Toronto. We continue to add to our investment in the Sankaty European Opportunities Fund which we expect to continue to generate a high-teens net return for its investors.
We are very pleased with the progress of the private equity, real estate and hedge fund components of the Alternative Trust which continue to perform to our objectives while showing positive growth in both up and down stock markets. With respect to the private equity component of the Trust, we believe we are at an important inflection point for several of our investments which will in turn drive significant positive returns for the Trust in the quarters and years ahead.
MacNicol & Associates Asset Management Inc.