‘Two things characterize Clarity Capital in terms of investments: global orientation – our portfolios have always been more international and less concentrated in the Israeli market, and the significant place given to private investments, also known as alternative investments,” says Eran Peleg, chief strategist at Clarity Capital, an investment management company that provides wealth management and investment services to private and institutional investors in Israel and around the world.
“In the last year or two, the issue of alternative investments has gained more resonance, but this is an area that we have been involved in for many years and is a significant part of the portfolios we manage,” explains Peleg. “The financial markets are volatile and have recently suffered from severe instability, even before the fighting broke out in Ukraine, against the background of high inflation and expectations of interest rate increases. The war only made things worse.
“That is why it is important to emphasize that there are other places to invest – not only in the volatile capital market. During this period, it is especially worthwhile to focus on alternative investments because it is difficult to know what tomorrow may bring and where the market is headed.”
“Alternative investments have always been a significant part of Clarity Capital,” Peleg points out. “The best way to define a private, or alternative investment, is that it is not bonds, stocks or cash, which are the tradable parts of the portfolio. It can include investments in real estate, infrastructure, private debt or shares of private companies (known as private equity) – these are long-term investments. What characterizes these investments is that they are neither liquid nor tradable. Some investments allow the investor to exit occasionally, and some are locked in for five or seven years.”
The entry requirements for these investments are relatively high and not suited for every investor because one needs to invest a significant amount. This market was once intended primarily for institutional investors, and in recent years there are more options for private investors to enter but minimum ticket sizes are high. Sometimes there are regulatory limitations, and it is important to know all these details in advance.
International Experience
Clarity Capital (formerly KCPS) was founded in 2006 by Tal Keinan, David Steinhardt and Jay Pomrenze, with offices in New York and Tel Aviv. The company is under the jurisdiction of the Israel Securities Authority, the US Securities and Exchange Commission, and the financial authorities of Ontario and Quebec in Canada and focuses primarily on private wealth management and family office services. The partners in the company have a rich background in the financial field, and most of them have worked abroad, including Peleg, who holds an MBA from Oxford University and was previously a senior investment manager at Gartmore in London and head of international investments at Gmulot, previously the institutional asset management arm of Bank Hapoalim Group.
“This relates to our global orientation,” says Peleg. “Our team has experience in international markets and top-tier financial entities and knows how to provide service in investment management, especially for wealthy families, in Israel and the United States, and to organizations, philanthropic foundations, trusts and other entities.”
Clarity Capital has previously also managed several alternative investment funds, the most well known of which is the KCPS Manof Fund, which it operated for a decade after the company won a tender on behalf of the state in 2009 to manage the NIS 1.2 billion fund. Two years ago, the company won another state tender for the establishment of an investment fund in cooperation with the Inter-American Development Bank, which will invest in the debt of infrastructure projects in Central and South America.
“One of our advantages is that we work only with large clients, and we are not a retail investment house, so from the outset, the size of the portfolios allows for this type of investment,” says Peleg. “Another advantage is that thanks to the longstanding relationships we have developed with the entities that manage the funds and investments, we can allow our investors to invest much smaller amounts. In a tradable investment, one can invest through a bank account or a brokerage, and one can buy whatever stock or bonds one wants at the touch of a button. But in alternative investments, one must know the working bodies, know whom to talk to, and even then, one has to deal with the issue of the minimum amount of investment, which is something that we solve.”
Peleg emphasizes the advantages of alternative investments compared to other avenues. “For some time now, the bond market has been difficult,” he notes. “In 2021, global bond indices were negative, and they have continued in a negative trend this year, but if one invested in private debt, which is also an alternative investment, one could achieve positive returns at a similar risk level.”
Peleg continues: “We invested in a fund managed by a large American asset manager, which provides loans against real estate in the United States, such as a first mortgage on large commercial real estate properties. I have a first lien on the property and if the property owner doesn’t pay the interest and repay the loan, I will take the property. It’s a defensive investment. There could be a situation where real estate prices will go down, but they must go down quite a bit for my loan not to be covered. The point is that in alternative investments, I can generate a relatively stable return and be less dependent on the tradable market.”
It is correct that if one invests, for example, in a venture capital fund, the ability of portfolio companies to make an exit ultimately depends on the tradable market,” he adds. “In the case of alternative investments, the tradable market still affects returns, but it does not affect them from one day to the next. In this case, what matters is what the market will look like in seven years, when those companies reach maturity. I don’t need the market right now. I need the market in five to 10 years for the investments I’m making. Such investments allow me to diversify the portfolio to investments outside the capital market and to reduce my exposure to weekly or monthly price fluctuations.”
Infrastructure and Renewable Energies
According to Peleg, one of the hot topics in the alternative investment market today is infrastructure, which is gaining momentum in many European countries and the US Clarity Capital is also very active in this field and works with a large fund that invests in infrastructure in the US. “It is a long-term medium-risk fund, and it can generate double-digit returns,” explains Peleg. “Following the coronavirus crisis, the US government introduced a plan to invest in infrastructure. The goal is to increase government expenditure to support the economy and improve infrastructure, which requires improvement after years of neglect. In the past, when people talked about infrastructure, they meant roads and interchanges. But today infrastructure is also communication lines, data centers, cybersecurity and the like,” he adds.
“Investments in renewable energy are also considered an investment in infrastructure,” Peleg stresses. “Apart from the issue of the climate crisis, the geopolitical aspect has also recently emerged. Oil and natural gas prices have spiked because of the Russian war in Ukraine. Russia is holding Europe by the neck because of its dependence on Russian energy. In order to be liberated and to ensure their energy security, European countries need to invest and further develop the infrastructure of renewable energy.”
Venture capital investments are also in focus. “More and more venture capitalists are now specializing in specific sectors. For example, we invested in a fund that focuses on financial technology (fintech). It’s an interesting field with dramatic developments. The new technologies are making a significant difference in the financial sector. The banks have begun to realize that this endangers their position, which led them to become more involved in the activity to control the process. It is a broad field and includes advanced payment system technologies, financial security, digital currencies and blockchain, insurance and a wide range of other issues. We also invested in a fund that deals with mediatech, technology in the media and the telecommunications industry. Quite a few successful companies from Israel have emerged in this field and it is an industry that is flourishing here.”
Peleg emphasizes the advantages of alternative, private investments, especially against the background of the global economy’s fluctuations recently. “At any moment, things change drastically,” he said, “even before the war between Russia and Ukraine, we had entered a challenging market environment. It started as early as last year when we started to see inflation climb. A lot of this has to do with the pandemic – supply chain issues and changes in the labor market – but is also due to the governments’ response to the event.”
It is important to remember that many things have changed as a result of the coronavirus, such as increasing government expenditure. Israel, the US and other countries have very large deficits, and the labor market has changed radically. In the US, there has been a large wave of resignations from companies, and people today are not willing to work at any salary and want to work from home or in a hybrid way.”
“Following the increase in inflation, central banks were forced to make a significant change in monetary policy,” adds Peleg. “In previous years, they were busy lowering interest rates in order to inject liquidity into the markets, and now they need to change direction. Expectations of interest rate increases, which began to climb in mid-2021, began to affect the prices of financial assets. The damage there is the most pronounced because of the possibility tradability in the capital market and the immediate adjustment of the prices of assets traded to the emerging reality. This is the challenging environment we find ourselves in today. It is necessary to raise interest rates to combat inflation, but we fear that growth is not strong enough to meet this and balance is needed.”
This article was written in cooperation with Clarity Capital.
Translated by Alan Rosenbaum