WAM Alternative Assets Limited (ASX: WMA) Review

June 2, 2024

WMA Alternative Assets Limited (ASX: WMA) is a listed investment company (LIC) that provides exposure to a portfolio of alternative assets including private equity, real assets, real estate, infrastructure and private debt strategies. The Company seeks to gain exposure to these asset classes through a range of structures including funds, coinvestments, secondary investments and separate mandates. The Company seeks to deliver absolute returns through a combination of dividends and capital growth, while providing
diversification benefits to investors. The portfolio is managed by Wilson Asset Management (International) Pty Ltd (“WAMI” or the “Manager”), which forms part of the Wilson Asset Management Group. WAMI has now been managing the portfolio for over three years after being appointed in September 2020 by shareholders and officially commencing as Manager in October 2020. Since taking over the management of the portfolio, WAMI has employed an amended investment strategy with the Manager seeking to realign the portfolio with the broad macroeconomic trends identified by the Manager and adding additional asset classes to increase the diversification in the portfolio. The transition of the portfolio has taken time as a result of the illiquid nature of the portfolio of investments that was inherited from the previous manager. The Manager has now exited 11 investments, with a significant partial redemption from the Argyle Water Fund, which remains the largest investment in the portfolio. The Manager has reinvested the capital into 11 new investments, including expanding the portfolio into healthcare real estate, infrastructure and private credit. Almost 70% of the committed capital to these investments has been called with the remainder sitting in cash waiting to be called. The remaining inherited investments (which represent approximately 25% of the portfolio) are expected to be fully exited by the end of FY26. The Company pays a management fee of 1.0%p.a. (excluding GST) to the Manager and there is no performance fee. The fund of fund structure means there is a double layer of fees, however we note that Company provides access to institutional style fees which would be unavailable to retail investors.

An investment in WMA is suitable for those investors seeking exposure to an investment that has the potential to provide diversification to traditional investments (equities and bonds) in an investors portfolio. Since WAMI took over management of the portfolio, the portfolio has experienced significantly lower volatility and uncorrelated returns to the domestic equity market, delivering diversification benefits. We note that a feature of LICs is that the share price may dislocate from the portfolio value. This has been the case for WMA which has resulted in shareholder returns being negative over the 12-months to 30 April 2024, despite the portfolio delivering a positive return over the period. There are a number of factors that we believe are contributing to the dislocation that we have detailed in the below report. While the share price may dislocate from the portfolio value, a key benefit of the LIC structure is it provides liquidity to an illiquid investment. The Company seeks to provide a combination of capital growth and a regular dividend. The dividend component will be sourced from a combination of income received from the portfolio and capital gains realised from the underlying investments. There is limited transparency regarding the underlying investments, a feature of private investments. Investors should be comfortable with the additional levels of risk associated with low levels of transparency.

IIR has maintained its Investment Grade rating for WMA. Since taking over the management of the portfolio, WMA has made significant strides in recycling capital into new investments that provide exposure to a diversified portfolio of alternative investments not readily accessible to retail investors. The Portfolio Manager has a significant amount of experience in alternative assets however is still building up a track record with regards to this vehicle with almost all exits to date being investments made from the previous manager. Further to this there is high levels of key man risk surrounding the Portfolio Manager. We expect the Manager to add personnel when they are in a position to grow the company, which
will require to discount to be eradicated. With regards to the discount, at this time we do not see a catalyst that will result in the Company re-rating to NTA. As such we would be expecting the Company to be required provide shareholders the opportunity to liquidate the Company at the 2025 AGM. Given this, we view to be significant risks for investors at this time. If a vote did occur and shareholders voted in favour of liquidating the Company, the portfolio would go into “run off” with capital being repaid as investments were able to be exited. While liquidity in the portfolio has improved, there has been a number of recent private equity investments which would likely take some time to be realised. We believe this risk is being factored into the trading price of WMA. The removal of the risk surrounding the longevity of the vehicle will be a key inflection point for the Company.

To view the report click here.