What are Alternative Investments?
An alternative investment is an investment in an asset class that isn’t a conventional asset class (such as stocks, bonds and cash). These include private equity, venture capital, hedge funds, real estate, commodities, derivatives contracts etc. but can include anything else that is investable such as wine and music rights.
Investing into alternative assets in the correct way can generate higher returns and spread out investment risk for investors vs. conventional asset classes.
Alternative investments are generally held by institutional investors or accredited, high-net-worth individuals because of the complex nature and limited regulations of the investments. They are generally inaccessible to the vast majority of investors due to their high minimum investment amounts and complexity compared to conventional investments.
Due to the complexity and in-depth knowledge/ skills required to invest into alternative assets, most investors invest via dedicated alternative investment funds which have specialized teams with the necessary experience and skillset required to invest in a particular alternative asset class.
There are five broad categories of alternative investment funds:
Private Equity (PE) funds invest into established private companies with an aim to generate returns by growing the value of businesses over a 3 to 5 year period and selling it thereafter. PE funds achieve this through a combination of growing revenues and improving the operations of the business they own etc. Some well-known examples of private equity owned companies include Burger King, Boots Pharmacy, Dell and Samsonite. Over its lifetime of around 5–10 years, a PE fund will invest into a portfolio of different private companies (around 10–20 companies). PE funds aim to deliver annual returns of 15–25% p.a. and return 2–2.5 times the investors capital.
Venture Capital (VC) funds invest into early-stage, emerging growth companies in exchange for an equity stake in the business. The goal of VC funds is to make a profit from growing an idea/ start-up into a large and successful company, thereby increasing the value of the investment. VC funds do this by providing access to growth capital, expertise and relationships to the companies they invest into. VC investments are riskier as not all start-up businesses succeed; hence, a VC fund reduces risk for its investors by investing into 15–40 different companies in a single fund. VC funds aim to deliver annual returns ranging from 15–30% p.a. and 2.5–3 times the investors capital.
Private Debt funds provide loans or debt financing directly to borrowers, without the presence of a bank or intermediary. In this way, the private debt fund gets the direct benefit from the economics (interest payments etc.) of the loan provided to the borrower. Depending on the strategy of the private debt fund, investments could be in the form of direct loans to companies across various sectors, real estate financing, and specialised lending (e.g. project finance, leasing, trade finance, guarantees etc.) Private debt funds aim to deliver annual returns of 5–15% p.a., and investors usually receive periodic interest payments or coupons from the fund.
Hedge Funds invest money into anything that they believe will make a profit. They aim to invest in a manner that generates profits in spite of strong or poor performance of the global financial markets. They don’t usually measure their performance against an index or benchmark. Instead, they focus on trying to deliver a positive return whatever the circumstances. They invest across a variety of securities such as stocks, bonds, currencies, commodities and derivatives, however, some hedge funds also invest in illiquid securities. Hedge funds target annual returns ranging from 2–15% p.a.
Real Estate funds make equity and debt investments in property. Depending on their strategy, real estate funds can invest into low-risk properties with stable cash flows/ rental yield in strong metropolitan areas, or into riskier investments such as land, property development, property improvement or redevelopment. These funds aim to generate annual returns of 5–20% p.a. and 1.5–2.5 times the investors capital.
About AtomInvest
AtomInvest is a fintech platform democratizing access to alternative investments. Through AtomInvest’s platform, investors and their advisors can invest into some of the world’s leading and best-performing alternative investment funds across private equity, venture capital and hedge funds.
To find out more, visit us at www.atominvest.co
