Alternative investments are projected to increase 59% from 2018 to 2023 to a staggering US$14 trillion. Once considered unconventional, alternative investments are fast becoming mainstream, generally offering better diversification than the public markets with significantly higher returns due to their illiquidity premium.
Serious investors who do not want to miss this burgeoning opportunity should act before it’s too late. In this article, we cover three unique characteristics that make alternative investments a better strategy for investors.
1. Enhanced diversification
Alternative investments are often referred to mistakenly as a single asset class, They are not. Unlike stocks or bonds, each alternative investment has a unique revenue source, strategy, risk and return. Private equity, private debt and private real estate differ from their public counterparts. Their performance is often independent from the swings of the public markets. Bad publicity will not slash their value overnight, nor will a celebrity endorsement raise it. Being distinct from the wider market, private investments can offer superior diversification.
Diversification is especially useful in times of market volatility or recession. When larger proportions of investors’ wealth are not in publicly traded assets, investors are better shielded against market fluctuations.
Alternative investments are more resistant to volatility because they’re generally less liquid and cannot be traded on a whim. This allows assets to realize their full long-term potential before they’re sold and entrenches the risk and return levels, so that rebalancing is required less often. At the core of alternative investments is practically unrivalled diversification and long-term strategic thinking, giving them a real edge over public market opportunities.
2. Superior returns
Alternative investments can also unlock fresh revenue sources. Private investments tend to do better than publicly traded assets. According to research by the British Private Equity and Venture Capital Association released in September 2020, UK private equity has consistently outperformed public markets over the past 10 years. Further research shows that these superior returns are set to continue in the aftermath of COVID-19 with attractive valuations.
Experts have highlighted the significant return potential of private debt as companies rebuild. Our clients heard this first-hand during our insightful webinar with Mr Johannes Huth, Managing Director of global investment firm KKR. Mr Huth revealed that his firm is taking advantage of this trend by investing more than $16 billion in private markets this year, mostly in private debt.
Alternative investments tend to deliver better returns for several reasons. First, private companies do not have the same obligations as public ones, freeing them to focus on profits. Second, private investors tend to select larger, longer-term investments with much higher profit margin potential than publicly traded assets. This can drive up the figures considerably. Third, illiquidity generates superior returns due to the liquidity premium. Private markets tend to be more opaque than public markets and less efficiently priced. So, it’s much easier to find bargains in the world of private investing. There’s also more scope to negotiate and fewer market participants to drive prices up. Investors who buy at a good price and are willing to hold illiquid assets for a long time can achieve considerable returns.
3. Public markets are unstable
Anyone can invest in public markets, and that’s exactly the problem. Crowded markets and amateur investors can drive markets in unpredictable directions. In good times, investors flock to the hottest stock or sector, distorting the market with unrealistic valuations. At the first sign of trouble, they liquidate their position and send prices plummeting. This is frustrating for experienced strategic investors.
Market noise can create bubbles of exaggerated valuations that spark a chain of economic events when they pop. The Japanese real estate bubble of 1985, the 1990s dot com bubble, and the housing and credit crisis of 2007 were all triggered partly by emotional investing and herd mentality across the stock market.
Strategic investors can no longer rely on the tired old “60% equity and 40% bonds” approach. They need to invest alongside serious financiers, not good-time amateurs in exclusive opportunities that cannot be distorted or manipulated by crowds of new investors on cheap trading platforms. Such opportunities drive revenue and build value away from public eyes. Serious investors need access to the private markets.
Unlocking better investment opportunities
Here at The Family Office, our leading experts in the largest financial markets use their local contacts and global reach to unlock exclusive private equity and private debt opportunities to the right investors.
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