Adjacent Markets: The Hunt for Uncorrelated Assets

In Brief:

Jeff Collins, Managing Partner at Cloverlay, joined S&P Global's Private Markets 360° podcast to discuss his firm's distinctive investment approach in "adjacent private markets." Established nine years ago, Cloverlay focuses exclusively on uncorrelated niche assets that exist in the spaces between traditional private equity categories. Collins explained how his 16-person team targets overlooked or misunderstood assets - from Care Bears intellectual property to Scotch whiskey inventories - that deliver institutional-quality returns while remaining absent from conventional investment portfolios.

Big Picture Drivers:

• Uncorrelated returns: Assets that perform independently from traditional markets

• Competitive advantage: Targeting niches before institutional capital becomes aware

• Patient capital: Typically holding investments for approximately five years

• Early positioning: Investing 3-4 years before formal opportunities emerge

Key Insights:

• Market definition: Cloverlay targets "assets that most institutional investors don't realize you can own," creating an investment universe largely invisible to mainstream allocators

• Leverage avoidance: Unlike traditional PE, most investments enter unlevered, insulating from interest rate shocks while creating enhanced exit options for future buyers who can apply leverage

• Evolution strategy: As niches attract competition, Cloverlay moves to second and third-order opportunities, like targeting undervalued music genres when broader music royalties become overpriced

• Diversification benefit: Portfolio assets intentionally have zero correlation with each other, creating genuine diversification rather than the illusory diversification of correlated market segments

• Patient sourcing: Success requires maintaining extensive networks across numerous niches simultaneously, with most conversations yielding nothing until circumstances suddenly create openings

• Valuation approach: Assets are purchased below intrinsic or replacement value without leverage, containing downside while maintaining exposure to "right-hand tail" equity outcomes

Memorable Quotes:

• "We invest in the cracks between the traditional lines of strategies inside of private equity." - Jeff Collins, describing Cloverlay's unique positioning in spaces ignored by conventional private equity categories

• "We've always been known as a willing audience for the nichy and the weird." - Jeff Collins, explaining their reputation for considering unusual investment opportunities ranging from stud bulls to rare coins

• "I found that patience is almost always rewarded in this particular kind of investing." - Jeff Collins, contrasting their approach with traditional PE's emphasis on swift deployment and exits

• "Our commercial license is to hang around the hoop in each of these segments and monitor them as closely as we can to identify the changes as they occur." - Jeff Collins, explaining how they spot emerging opportunities in previously uninteresting niches

The Wrap: 

Collins presents a compelling case for why unconventional assets deserve attention from institutional investors seeking genuine portfolio diversification. While traditional private equity faces headwinds from rising interest rates and challenging exit environments, adjacent private markets offer relative insulation through unlevered structures and self-liquidating exit pathways. As competition eventually enters these niches, Cloverlay's strategy of constant exploration and early positioning continues to identify the next generation of overlooked assets.