Local capital market investors have long been painted with a broad brush and stereotyped as being conservative and risk averse. Although a segment of the market does tend to have a low risk tolerance and while the market-wide appetite for volatility may be lower than the global average, generalising market participants thwarts the development of different asset classes.
Making A Case
Alternative investments, such as venture capital, real estate investment trusts (REITs), distressed debt, asset-backed securities and structured products, continue to see their share in the market shrink due to the perceived risks of these assets. While valiant efforts have been made by a few optimistic marketers, alternatives have not yet gained traction in the country. Despite the fact that the Venture Capital Act was passed in 1994, no single entity has used the programme as a launchpad to list on the Trinidad and Tobago Stock Exchange. Meanwhile, capital raised by venture capital firms across the region has whittled down to virtually zero. Although deal flow and costly regulations remain a hurdle, the persisting overarching educational gap is the primary challenge to establishing a viable alternative investments market in T&T.
Counter-intuitively, the main argument against alternatives of low liquidity and long lock-up periods also does not hold weight in the local market due to the fact that the traditional stock market is equally illiquid and long-term oriented. Large shareholders are unable to quickly enter or exit positions without fear of moving the market. Therefore, private equity transactions, which generally involve taking sizeable equity positions in companies with the goal of growing them at a fast clip, would only suffer from idiosyncratic risks associated with the target company, as opposed to liquidity and market risks, which would be at an equitable level.
Furthermore, certain alternative investments such as structured products and REITs can be viable hedges from an aggregate portfolio point of view. When structured appropriately, alternatives can even provide a hedge against downside risks in international holdings due to a low correlation with wider markets. Additionally, certain small and medium-sized businesses can continue to grow despite worldwide recessions. As an example, private hospitals not only survived, but thrived through the global economic crisis of 2008-09, as many wealthier individuals chose to receive their health care in-country as opposed to flying overseas. More recently, a shortage of foreign currency has boosted the prospects of small farms that have been able to increase production to lower T&T’s food import bill. These businesses make viable and scalable prospective investment opportunities for institutions.
Addressing Barriers
The education system has historically spawned administrators who emphasise risk-aversion. Consequently, long-lasting shifts in the investor mindset that proponents of alternative investments would like to see must begin in school. Financial literacy should be regarded as important subject matter, much in the same way that science, maths or English is. Deals surrounding alternatives can only be normalised if they are better marketed and understood by a wider audience. Regionalisation of markets also remains a critical goal. While typically championed by stock market investors, seamless cross-market access would serve to boost alternatives as well. A wider pool of investors, diversification benefits from different economies and, most importantly, a sustainable exit strategy are all key points in ensuring that alternatives are a reliable investment strategy locally. Other common goals, such as boosting technology in the transfer and clearing of financial instruments – especially in the form of electronic auctioning systems – need greater attention. Lastly, regulatory and tax rules must be further improved to incentivise and stimulate the market. While some work has been done in these areas, a more focused approach – especially in educating all market participants – is needed before alternative products are seen as worthwhile options by local investors.
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