Episode 70: The Real Opportunity in Real Assets
What is the investment proposition of ‘real assets’? John Tanyeri, Head of Real Assets and Originations, and Matt Lindland, Head of Structured Products, join Macro Markets to review the spectrum of investments in the asset class—like infrastructure, commercial real estate, and securitized cash flows from hard assets—and their place in a diversified portfolio. They also discuss how trends like digitalization, decarbonization, deglobalization, and demographic shifts should help drive returns going forward.
This transcript is computer-generated and may contain inaccuracies.
Jay Diamond: Hi everybody. And welcome to Macro Markets with Guggenheim Investments, where we invite leaders from our investment team to offer their analysis of the investment landscape and the economic outlook. I'm Jay Diamond, head of thought leadership for Guggenheim Investments, and I'll be hosting today. Now let's get started. Forecasting economic growth inflation and interest rates is always difficult to do—maybe now more than ever. But whatever the circumstances, investors have increasingly turned to real assets with the objective of generating stable, recession resistant income, inflation protection, and portfolio diversification. So what are real assets and what is their investment proposition? Well, joining us today to make us smarter about this is John Tanyeri, head of Guggenheim Investments Real Assets Group, and Matt Lindland, who's head of our Structured products team.
Welcome, John and Matt and thank you for taking the time to speak with us today.
John Tanyeri: Thanks, Jay. Great to be here.
Matt Lindland: Thanks.
Jay Diamond: So, John, let's start with you. Real assets means different things to different people and different firms. How do you define real assets?
John Tanyeri: You're correct. You know, real assets does mean different things to different people. When we think about real asset investing, it involves allocating capital to tangible physical assets that have intrinsic value and tend to provide long term, contracted, stable cash flows. At Guggenheim, we consider investments in real estate infrastructure or military housing and private sector credit to fall within the real assets world.
Jay Diamond: What sectors or asset classes does that include?
John Tanyeri: Sure. So it's a long list, but, real assets, targeted investments that support economic mobility by focusing on four main categories the movement of goods, people, energy and digital information. At Guggenheim, these pillars form the foundation of our investment thesis and are aligned with prevailing macroeconomic themes, including, but not limited to, you know, energy transition, digitalization, globalization, and demographic shifts. Within the movement of goods, real assets includes sectors such as logistics, shipping, rail, ports and airports, just to name a few. Within the movement of people, real assets encompass housing, office, transit, parking, and social infrastructure, which are increasingly influenced by demographic change and evolving workforce dynamics. You know, these investments are interesting because they're underpinned by long secular tailwinds such as urbanization, population growth and public sector modernization.
I think what's fundamentally changing, too, is social infrastructure in particular, like health care and education facilities, they offer essential services with low cyclicality and strong public private partnership support. So, within the within the movement of energy and resources, real assets in this category include renewable energy, power generation, transmission, midstream oil and gas, LNG and utilities. And these sectors are primarily driven by policy mandates, decarbonization goals, and obviously increasing demand for grid modernization and energy as a whole, ot to mention reliability. Finally, I think the movement of digital information is a growing asset class. We see this to be probably the asset class that is demanding the most investment opportunity today. And that movement of digital information reflects the ongoing push towards digital ubiquity and a connected economy. Real assets in this space prioritize investment in data centers, fiber, broadband networks, and telecom towers.
Jay Diamond: And are you looking globally?
John Tanyeri: We are looking globally. I think the dynamics there are quite different. in the U.S., when we think about infrastructure, specifically. Most of the infrastructure is primarily in state hands, right? So, we have a very fragmented government here, where if you look at things globally, most of the infrastructure there has been privatized. So that really started out with Margaret Thatcher in the UK, where she initially privatized all her infrastructure. And then that spread fundamentally over to Canada, where they invoked a large public-private partnership program. And so where the provincial assets raise capital to fund their infrastructure assets. It's a very different approach when you think about things outside the U.S. In the U.S., we still have most of our economic assets within state control. Outside the U.S., most of those assets are run more efficiently because they're privately managed.
Jay Diamond: So John, staying with you for a minute. What is the philosophy behind real asset investing?
John Tanyeri: Sure. So, you know, when we think about real assets and the philosophy, it's rather simple. You know, the philosophy of real asset investing is grounded in really the pursuit of long term value, income stability and inflation protection through the investment of these tangible and essential assets. These assets, basically spanning infrastructure, real estate and natural resources, are not only physically durable, but they're also tied to, as we mentioned earlier, the fundamental economic and social viability.
And so given that these assets often serve public and societal functions, so successful investment requires navigating complex regulatory environments, aligning yourself with stakeholders, and managing or evaluating assets over a long period of time, not only decades. The investment philosophy also values patient capital with active asset management. And so long term partnerships with equity sponsors, government operators and communities is really fundamental to being successful in investing in this asset class.
One other thing is it also emphasizes adaptability, recognizing that macroeconomic themes today may not be the macroeconomic things tomorrow. These themes change from time to time, and they will always continue to reshape demand. And then finally, investors are drawn to real assets for their ability to generate predictable, often inflation-linked cash flows, which are supported by long term contracts, regulatory frameworks and tend to be noncyclical in nature.
Jay Diamond: In general, how should an asset allocator, an institutional investor or an individual investor think about the place of real assets in their portfolio?
John Tanyeri: Sure. So, for institutional investors, I think real assets serve primarily as a hedge against inflation and a diversifier from traditional equities and fixed income. They also will offer institutional investors a source of incremental spread over duration and rating-adjusted public corporates. So, in addition, I would say they're also quite attractive to institutional investors given the low capital charge.
And when we think about demand in general, you know, currently most institutional clients are they're underweight real assets. And when you think about their existing portfolio, their allocations or maybe only like 3 to 5 percent, and we believe allocations should be higher. Given what we just said earlier, we think an allocation of 10 to 15 percent is warranted. Real assets provide institutional clients with the opportunity to find long duration assets that will help immunize their long duration liabilities.
Jay Diamond: So, John, you touched on some of these things in your, description at the top of the call, but what do you see as some of the major drivers of performance for real assets going forward?
John Tanyeri: There are a number of drivers and structural themes that are dominating this asset class. Probably the most important macroeconomic theme is literally the substantial underinvestment in aging U.S. infrastructure. And so, the American Society of Civil Engineers report on the state of U.S. infrastructure every four years. And the current infrastructure report highlights the urgent need to modernize and maintain aging infrastructure in the US.
In its most recent assessment, it gave the nation a C-minus. And you know, we know that if we if our kids came home with a C-minus, we'd be awfully disappointed. But this truly reflects the widespread underinvestment in deferred maintenance across a number of sectors. I mean, areas of greatest concern are simple sectors that need investment every day: roads, transit, water, and generally just outdated systems that are struggling to meet current demand. When we look at what that opportunity is, the American Society of Civil Engineers estimates that that's a $2.6 trillion opportunity for additional investment over the next decade, and that's what's needed to fund this infrastructure gap. This represents a substantial opportunity for private capital to partner with public entities to rebuild critical assets that underpin economic growth.
Jay Diamond: So, John, you and I have talked about this before, and you mentioned it again at the top of the recording, but there are some powerful forces that all start with the letter D. Digitalization, decarbonization and deglobalization and demographic changes that are going to be driving some of the investment themes going forward. So, let's start with digitalization.
John Tanyeri: Sure, so the demand for digital infrastructure is surging, due to rapid growth in consumption, data consumption, cloud computing, AI, and 5G deployment. I mean, these trends are driving the need for more data centers, fiber networks, and wireless towers, especially given the change that we've seen with remote work, streaming and just connected devices in general becoming more deeply embedded in daily life.
Some of the best opportunities we see is in supporting broadband expansion in underserved areas, and other opportunities exist, such as data centers with hyperscalers. And that actually results in other tangential opportunities in power, water, and transmission to help support this hyperscale cloud and AI applications build out. I mean together these forces are creating sustained investment opportunities across the whole digital ecosystem.
Jay Diamond: Same question for decarbonization. What is that landscape like and what's going to be driving investment opportunities?
John Tanyeri: So, the global shift that we're seeing in decarbonization is driving strong demand for renewable energy and supporting infrastructure. Growth in solar, wind and battery storage, is being fueled by falling technology costs, increasing power demand, and the need just for cleaner energy sources. I mean, one thing that's happening in the US, and as we mentioned with digital and now with energy and decarbonization, is that we just need so much power.
And so we need as much as we can get, regardless of whether it's coming from conventional energy or clean energy. But when we think about decarbonization, one other sector comes to mind and one other theme, and that's the electrification of transportation and the industrial processes, is placing new demands on the energy created and accelerating the need for investment in generation, storage, and transmission assets.
Jay Diamond: And how about Deglobalization?
John Tanyeri: Sure. So when we think about the Trump administration or Trump 2.0, there's been an emphasis on reshoring, simply bringing manufacturing and supply chains back to the U.S. And that's truly affecting the real asset sectors. I mean, it is driving demand for industrial real estate such as warehouses, logistics hubs, chip factories, and also regional infrastructure for power, water, and increased broadband. We're also seeing the more of buy American provisions, which are stimulating domestic production and investment, especially in growth markets in the Midwest and in the southeast.
Jay Diamond: And finally, how are, demographic changes creating investment opportunities in real assets.
John Tanyeri: Demographic shifts in the U.S. are reshaping demand across infrastructure, real estate, and other essential services. I think the aging baby boomer population is increasing demand for health care infrastructure, senior housing, and stable utility services. Meanwhile, the younger generation, millennials, and Gen Zs are driving growth in multifamily housing, manufactured housing, and even mixed use developments, especially in the affordable Sunbelt and Midwest cities. These trends are creating location specific opportunities for real asset investors, and they're basically tied to where and how Americans are living, working, moving, and aging.
Jay Diamond: Now turning to you, Matt. You're on the structured credit team, working closely with John Tanyeri on his Real Assets Initiative. So how does your work align with real assets?
Matt Lindland: Structured credit is the practice of converting cash flows from assets into payments on a capital structure designed specifically for those assets. These can either be financial assets like pools of mortgage loans or real assets with robust contractual cash flows from leasing or operation. They can include transportation assets like commercial aircraft, rail cars or shipping containers; fixed assets like data centers and communication networks; and other contractual cash flow assets such as pharmaceutical royalties or intellectual property licensing.
Matt Lindland: Since structured finance builds capital structures of debt and equity tuned to the cash flows of the assets, it's typically the most efficient way to finance capital investment in rapidly growing sectors of our economy.
Jay Diamond: So, in your work, Matt, are you more involved in buying these securities in the primary or secondary market, or are you structuring private deals on behalf of clients?
Matt Lindland: Well, we work across all markets to find the best opportunities for our clients. Public markets provide high and relatively consistent new issue volume, and secondary market opportunities can steadily increase or reduce exposures, plus give the ability to make opportunistic profits in difficult markets. Our key source of excess returns is our ability to execute private transactions, where we source pools of hard assets, negotiate their acquisition, create the capital structure, and manage the financing structures through their lifetimes.
This creates securities not available in the broad markets, achieves favorable pricing through our ability to commit the full price of an asset portfolio without market contingencies, and puts the management of our deals under our fiduciary duty to our clients.
Jay Diamond: Can you give us an example of how one of these deals might look?
Matt Lindland: Sure. A good example is a transaction we recently completed in aviation. We completed an investment focused on passenger aircraft, which are nearing the end of their lives, which have been on lease to high quality global airlines since their delivery 20-plus years ago. Where traditional aircraft leasing focuses on aircraft values and long-term leasing potential, these aircraft can have short remaining lives and high certainty of recovering value from contractual obligations of airlines like Air France, Air Canada, and British Airways. This let our clients pick up significant yield premiums to liquid securities in either aircraft leasing or in those airlines.
Jay Diamond: So are we generally positive on aircraft credit at this point in time?
Matt Lindland: We're positive on aviation credit right now for a number of cyclical and unique reasons. First, the recovery of air travel post the COVID shutdown has improved the airline credit substantially. You know, it's did cause a high level of distress in aviation credits, but the companies that have survived and prospered are in much better economic condition today. Second, there's been a sharp reduction in new aircraft production due to technical issues with the aircraft and engine manufacturers.
Yeah, these include both the Boeing Max, which was disrupted for years, as changes were made to the design, and several of the new technology aircraft engines, which are technological masterpieces, but have required substantial additional investment in maintenance and, yeah, and overhauls t, get them performing properly. This supply and demand imbalance favors owners of aircraft and particularly older aircraft of the last generation.
Matt Lindland: The main benefit of new aircraft technology is decreased fuel usage, which is a positive for the range of the aircraft and the environment. However, the cost of these aircraft generally is only valid above, typically $100 oil prices, so where we've been meaningfully below that for quite some time. And this is given significant life to older generation aircraft, which are perfectly competitive, much lower cost, and where they're increased fuel burn is not an economic disadvantage.
We see these conditions persisting into the early 2030s, given the substantial existing shortfall of aircraft production, and the very long production runs of the prior generation, which will, you know, keep those aircraft flying well into the 2030s.
Jay Diamond: So, guys, where the rubber meets the road is what kind of return profile real assets, can offer to an investor. So, what kinds of yields and returns can someone expect today investing in real assets. John, let's start with you.
John Tanyeri: Sure. So, from a general perspective, and when we think about relative value, we currently see investment grade debt opportunities from 200 to 300 basis points of spread over the i-curve. That results in a premium to the publics of approximately 50 to 75 basis points. When we look at high yield, you can pick up probably another 100 basis points of spread. And then finally, when we look at equity investment opportunities, we see those, depending upon the actual sector, resulting in yields somewhere in the mid-teens.
Jay Diamond: And that what kinds of yields and spreads are you seeing in the structured credit sector?
Matt Lindland: Well, clearly we've seen a lot of spread volatility this year, particularly around the tariff announcements in April. But in fact, the spreads have substantially round tripped, since then and are back around the tighter levels that we saw in January, February. Typically structured credit financing, hard assets will pick up 25 to 75 basis points over a corporate debt of comparable credit quality of maturity.
Private structured credit commanded an additional 25 to 75 basis points of marginal yield. We currently see spreads for senior private bonds with A ratings and 3 to 7 year maturities, about 200 to 250 basis points over treasuries, around 100 to 150 basis points over comparable corporates.
Jay Diamond: We can't talk about returns in upside without talking about some of the risks. So, John, let's start with you. What are the risks that, an investor faces in real assets?
John Tanyeri: Thanks, Jay. So, I think there are four potential risks of real asset investing. First, when we think about more generally the market and economic risk, you know, real assets tend to utilize a fair amount of leverage. And so rising interest rates can reduce the value of real assets, particularly in real estate and infrastructure,e due to higher discount rates, borrowing costs or exit cap rates.
Second, when we think about regulatory and political risk, infrastructure and energy investments are heavily influenced by government policies, zoning laws, tax incentives and environmental regulation. So, changes in policies can disrupt operations and potentially reduce profitability. When we think about international investments, geopolitical instability can be significant.
Third, and when we think about environmental and climate risk, assets like real estate and natural resources are exposed to climate change, natural disasters, and generally environmental degradation, which can obviously impair value or increase insurance and maintenance costs. Obviously, when we think about a number of the natural disasters that we've had in the U.S. recently, at times you can't even find insurance out for your real estate investments. And then lastly, technological disruption. These are long lived assets. And so energy infrastructure or even certain real estate types may become obsolete or lose its competitiveness to technological innovation. One thing that we can always look at as an example would be how renewables impacted traditional coal fire generation. You know, 20 years ago, coal fired generation was responsible for 60 percent of our electricity. Today it's responsible for less than 15.
Jay Diamond: And that what are you seeing? And in the structured credit world what are the risks there.
Matt Lindland: Three primary categories of risk. You know first collateral performance, which is generally driven by macroeconomic conditions. Second, counterparty performance, you know, i.e. the behavior of a lessee or other credits on which the, the collateral relies, driven by their own, you know, internal credit, risk factors as well as the global environment in which they operate. And thirdly, the impact of the structured credit market itself and really the impact of a credit structure in terms of allocating the risk of the performance of the underlying transaction amongst the various classes of investors and the structure.
Jay Diamond: So, John, this is a very attractive sector from everything we're talking about. But how competitive is this market, how much capital is on the sideline. What is the liquidity like for these kinds of investments?
John Tanyeri: Sure. You're absolutely correct, Jay. You know, the real assets market has become highly competitive with trillions of institutional capital, particularly from pension funds, sovereign wealth funds and insurance companies that are targeting core and core plus strategies. Industry experts, such as Preqin states that there is over 300 billion in dry powder allocated to real asset funds. When we think about liquidity, liquidity really varies by asset type.
So core real estate and listed infrastructure have higher liquidity, while private assets tend to be more illiquid with longer hold periods. So I think investors truly need to balance the illiquidity premium with long term, stable cash flows that these assets offer. And then ultimately factor in diversification.
Jay Diamond: Well, listen, you guys have been tremendously generous with your time. Really appreciate it on a busy day. But, John, before I let you go, what are the final takeaways you'd like for our listeners to remember from our chat today?
John Tanyeri: Sure. I mean, really at a high level, Jay, you know, when you look at today's challenging investment environment, which we all know is marked by persistent investment shortfalls, elevated interest rates and macro or even, you know, as of today, geopolitical uncertainty, you know, real assets offers a differentiated opportunity to invest in essential, high barrier-to-entry businesses that deliver stable, resilient inflation-linked cash flows.
And through our underwriting, we're able to provide significant, strong downside protection while avoiding cyclical opportunities, merchant, commodity, or currency risk. We think it's an opportunity that truly provides a number of institutional clients with an exciting platform that we have here at Guggenheim to take advantage of the real asset environment that we see continue to grow in the future.
Jay Diamond: Well, terrific. Matt, any last words for our listeners today?
Matt Lindland: Sure. You know, really the way we look at the sector is that complex underlying assets and tailored capital structures are more complex to underwrite than the now under-secured debt. But they provide greater security and incremental yield. They're a way to get paid to do more work rather than take more risk.
Jay Diamond: Terrific. Well, thanks again for your time, John and Matt. I hope you'll come back again and visit with a soon.
John Tanyeri: Thank you.
Jay Diamond: And thanks to all of you who have joined us for our podcast today. If you like what you are hearing, please rate us five stars. That's how people find out about us. If you have any questions for John and Matt or any of our other podcast guests, please send them to Macro Markets at Guggenheiminvestments.com, and we will do our best to answer them on a future episode or offline.
I'm Jay Diamond. We look forward to gathering again for the next episode of Macro Markets with Guggenheim Investments. In the meantime, for more of our thought leadership, visit Guggenheiminvestments.com/perspectives. So long.
Important Notices and Disclosures
Investing involves risks, including the possible loss of principal. Stock markets can be volatile. Investments in securities of small and medium capitalization companies may involve greater risk of loss and more abrupt fluctuations in market price than investments in larger companies. The market value of fixed income securities will change in response to interest rate changes and market conditions among other things. Investments in fixed-income instruments are subject to the possibility that interest rates could rise, causing their value to decline. High yield securities present more liquidity and credit risk than investment grade bonds and may be subject to greater volatility.
Structured credit and infrastructure investments are not suitable for all investors. Investors in structured credit generally receive payments that are part interest and part return of principal. Some structured credit investments may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and subject to liquidity and valuation risk. Close bear similar risks to investing in loans directly, including credit risk, interest rate risk, counterparty risk, and prepayment risk. Loans are often below investment grade, may be unrated, and typically offer a fixed or floating interest rate.
High yield securities present more liquidity and credit risk than investment grade bonds, and may be subject to greater volatility. Structured credit, including asset backed securities or ABS, mortgage backed securities and closer complex investments, are not suitable for all investors. Investors in structured credit generally receive payments that apart interest in part return of principal. These payments may vary based on the rate loans are repaid.
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