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Niche strategies have long been a feature of private equity. But as the ecosystem grows, we are seeing more fund managers investing in untrodden areas outside what you might call the alternative mainstream.  

San Francisco-based Cordillera Investment Partners is one such firm, framing itself as a provider of ‘alternative alternatives.' Founded in 2014, Cordillera targets specialized investments in anything from carbon credits to whiskey barrels to boating marinas. The firm reached a $443 million final close on its third fund in July. 

We spoke to Chris Heller, co-managing partner and founder of the firm, to find out more.     

PitchBook: What are "alternative alternatives" and can you tell us about some assets that would fit that description?

  Chris Heller Heller: The promise of alternatives is that by being early to something you can extract outsized returns before the market finds it. Then when everybody's money moves into it, you're already onto the next thing. So, one, it's an early move, and second, it is non-correlated. I think those are really the two pillars of alternatives.

What we think (about) when finding today's alternatives is being early, so we invest in barrels of whiskey, boat marinas, wireless spectrum licenses, all kinds of things. With others like music publishing, we were probably early on that nine years ago, along with litigation finance.

Let's talk whiskey, as most people know what it is. What's the investment thesis behind that?

Owning whiskey barrels is very different to owning the brands themselves. It's the aging process associated with owning barrels of whiskey in the US that's attractive. We use them for years and then we sell them to brands. Buying the brand inside a barrel is a tough business a lot like the restaurant business, where maybe one out of five will make it. So, we don't care which ones go out of business and which ones stay in business. We just sell it to whoever happens to be in business at the time when we're moving our product after aging it for years.

How long before something is no longer an alternative in your view?

We started out in two spaces, music publishing and litigation finance, 10 years ago. But then we moved on as the whole world found music publishing and litigation finance, so we don't want that stuff anymore.

There are many niche assets out there. How do you ascertain whether something is going to make a return?

I would categorize it as kissing a lot of frogs. For our latest fund, we looked at 390 different things and said yes to 14. There's a lot of things that are out there just for the sake of being weird. We have no interest in that. We get shown lots of things. The beauty of this space is that there is no real competition for deals around it. And if there are lots of private equity firms out there looking at a deal, it's not for us. So, we can take our time to underwrite these deals.
 
Institutional investors may be wary of investing in assets they don't understand. Why would this space appeal to them?

There's not this efficient frontier of: "if it's riskier it's higher returning" and "if it's lower risk it's lower returning" in niche assets. Our clients are sophisticated and understand that they want to get higher returns and non-correlation, because that increases the Sharpe ratio of their portfolio.

Can you get something that is not correlated with the rest of the things in their portfolio, but also delivers on their target returns? That is really beneficial to them. There's lots of things out there that are non-correlated, for instance, reinsurance. But it doesn't have very attractive returns.

Finding something that will zig when the rest of the things in a portfolio zag and can deliver high returns is a really helpful asset in their portfolio.

Given the nature of your portfolio, what's the exit strategy?

It depends on the deal. Take music publishing rights. We bought a catalog of music. Our original exit plan was to sell it back to a large music company. It just so happened that the private equity world had found music publishing at that time, so a totally different exit to a totally different buyer set. This was helpful because the backend multiples we were able to get due to lots of people entering the space wanting to buy this stuff was on the better side of what we had underwritten.

Featured photo by John Fedele/Getty Images
 

This article originally appeared on PitchBook News