The benefits of alternative investments in the time of Covid-19

Whisky, litigation funding and crowd farming are attractive alternative investments for South Africans.

South Africa has officially entered the third wave of Covid-19 infections, and health officials are calling for stricter lockdowns as our health systems buckle under the pressure. The excruciatingly slow pace of vaccine roll-outs and the discovery of new variants point to Covid-19 remaining a part of our lives for the foreseeable future.

With seemingly no end in sight to the pandemic, South Africans are bracing for further economic uncertainty. Those lucky enough to remain employed and working from home might be looking beyond equities and the stock market in an attempt to find asset classes that can prevail – regardless of the economic conditions.

It goes without saying that all investments need to be thoroughly researched and vetted before you part with your hard-earned money. It’s always prudent to keep money aside for rainy days, but suitable investments can pull you right out of hard times or keep you afloat during stormy weather.

A pre-pandemic report by Prequin, a private market data and insights specialising in alternative investments, predicted that the alternative assets industry would grow to reach $14 trillion (R199 trillion) in size by 2023. In addition, the report showed that an increased number of investors put their money into the tech industries, particularly blockchain technologies. But if you are looking to diversify your investments further locally, here are a few options you can look into.

Depending on how much cash you have to spare, here are three attractive alternative investments still in their early stages in South Africa.

Whisky
It’s not everyone’s go-to nightcap, and it’s more of an acquired taste. Spirit Vault Collective co-owner Neil Paterson says his firm offers investment opportunities in some of the rarest and finest whiskies available. According to Neil, “Whisky has no direct price correlation to stock or bonds. As a physical asset, its value is determined by the desirability of the brand, its quality and its scarcity.”

There are two types of whisky investors: those who consider themselves connoisseurs of the drink and may end up enjoying a glass of their investment, or those who see the higher range and rare scotches purely as an investment opportunity. “The second type is the real investor – someone attracted by the prospect of a healthy return when the particular bottles go on auction at some point,” Neil explains.

Returns on whisky investments are calculated on the price paid per bottle and the potential sale price if sold in a global auction.

According to whiskyInvestDirect, an independent England-based whisky trading company, Covid-19 lockdowns crushed Scotch whisky sales worldwide, with exports sinking 22 percent to a 10-year low both by volume and value. “ But this said, the Scotch industry thinks and acts for the long term, and many brand owners are already talking about a strong bounce-back,” says Rupert Patrick, WhiskyInvestDirect co-founder and chief executive.

Neil points out that the average basket of whiskies sold on auction last year during the Covid-19 stock market crash increased in value, whereas stocks decreased dramatically before regaining their value. Although the year-end results were similar to those of the S&P 500, the basket of whiskies was far less volatile. “So people would not have bailed out of their investment in whisky in the way terrified investors were getting rid of their shares,” added Neil.

Before investing in any spirits, potential investors should also consider the financial consequences of recurring alcohol bans as the pandemic continues.

Litigation Funding
A relatively new form of investment but appears to be gaining popularity across Europe and Australia.

“Litigation funding is fairly well-known in some other countries, but it’s relatively new to South Africa,” said legal finance firm Taurus Capital CEO Elad Smadja. Litigation funding allows third party investors, with no direct interest in a legal case, to finance case costs in return for a share of the claim proceeds if successful. “This form of finance allows proceedings to continue, which would otherwise be hindered by a claimant’s lack of funds,” explains Elad.

Litigation funding with Taurus Capital starts at R1 million. “It can be a high-risk investment because there is always the chance that the case will not be successful. But, when the investment is done via a firm specialising in this work, like Taurus Capital, the risk is lower because we conduct a thorough assessment before a particular case is chosen for funding. So we are quite confident about the chance of success of the cases we invest in,” said Elad.

He reflected on a recent case involving a multinational corporation. “Investors walked away with 8.5 times the amount they had originally put into the investment, after four years.”

Elad adds that many people are fed up with the uncertainty of returns offered by conventional investment forms because they are so affected by market volatility. “Those most spooked often resort to converting investments into cash but, while one’s capital may remain secure, there aren’t real returns to be made,” explains Elad.

“In addition, when an investor exits a stock market investment because of the fear associated with the uncertainty, they are bound to lose in the long run because they are inevitably selling out just when the stocks are at their lowest value. We, therefore, need to look for other ways to invest.”

Crowd Farming/Cash Cows
Launched in 2015 by KwaZulu-Natal entrepreneur Nututhuko Shezi and backed by an experienced advisory board, Livestock Wealth allows you to invest in cattle or plant-based products via an app. Investors can buy the young asset (livestock or plant-based) from the farmer through Livestock Wealth. The farmer then uses the money to grow and maintain the investment. When the asset matures, its value has increased. The farmer buys back the purchase (at a higher price) from the investor once it fully matures, earning a profit. The farmer can then sell the asset to the market at a profit. Assets include free-range ox, pregnant cattle, macadamia nuts and other plant-based offerings.

Cattle have long been considered a measure of wealth across the continent, and with rising global demand for beef, you can now invest in agricultural assets for as little as R1,000. Ntututhuko has grown his company from humble beginnings with just 26 cattle. Now Livestock Wealth has attracted more than 2,800 investors, 10 percent of which are foreigners, and has taken in over R70 million. Retailers such as Woolworths and Cavalier Foods have also partnered with the company, linking small-scale farmers to formal markets.