When most people think of investing, they generally think of traditional investments, shares, bonds, and cash. Whether it is an fund such as an ETF (Exchange traded fund) in your retirement plan or the cash in your bank account, these traditional investments are common to most investors. But in uncertain, disruptive, and inflationary market conditions, being able to earn a real return is super important!
A real return ensures wealth grows and your quality of life and standard of living is maintained, irrespective of market disruption.
Non traditional investments known as alternative investments is become one of the fast-growing asset classes.
Why? Because they deliver non volatile returns, uncorrelated to traditional investments and provide portfolio diversification with lower risk.
The alternative investment industry is expected to grow 59 percent by 2023, reaching $14 trillion in assets under management. Source: Preqin (pdf).
Investment Diversification
Expert investors know the value of diversifying their portfolio. In an ever-evolving market, it’s critical to spread risk across a variety of investment types, so that if one asset class takes a hit, the other investments can offset the loss. Provided the asset classes are uncorrelated, which unfortunately is the current situation with traditional investments! Harvard Business School 7 Alternative Investments
The traditional solution to growing wealth by investing in shares/equities/funds/indexes/ETFs/bonds/cash, “the traditional investments” has served investors well for the last decade. But in a disrupted world and volatile market, with above average inflation, what was correct for decades, is perhaps not the way forward; particularly for investors who have an investment timeline of less than 10 years!
Why invest in Alternative Assets?
Alternative investments could only be accessed by high-net-worth and institutional investors, as the barriers to entry in terms of the minimum required to invest was high. This no longer applies, as alternative investments are becoming more mainstream. Retail, or individual investors are increasingly getting the opportunity to incorporate these types of assets into their portfolios to reduce overall risk and maximize value. For all types of investors and industry professionals being informed about alternatives is increasingly important.
A Short Summary of Alternative Investments (Assets)
Collectibles
Rare wines, vintage cars, fine art, mint-condition toys, stamps, coins, baseball cards, NFTs etc.
Private Equity
Capital investment made into private companies that are not listed on a public stock exchange.
Private Debt/Credit
Loans to companies by institutional and private investors for companies to grow their business
Real Estate
Land, residential, and commercial property is the world’s largest asset class
Hedge Funds
Professionally managed assets, which are relatively illiquid when traded, using multiple strategies
Commodities
Mostly natural resources, like agricultural products, oil, gas, precious and rare earth metals
Structured Products
Many types, provided by institutions and banks, for example, performance is linked to an index, S & P 500 with downside protection with conditions and a predetermined term.
The Advantages of Alternatives
Very diverse asset class, each alternative is unique in their benefits and opportunity
● Provides lower volatility and diversification to an investors portfolio
● Provides low correlation to traditional asset classes
● Provide high yields and returns
● Provides lower risk
Disadvantages of Alternatives
● Can be illiquid, meaning to convert to cash can take time
Fixed Yield Notes (Debt/Credit financing for a business)
Private debt/credit refers to loans that are typically made by non-bank investors (i.e. not a bank loan) The investors are Institutions, Pension funds, and Private investors.
Benefits to Business Owners issuing fixed yield notes
● Ownership remains with the business owners …
● Current management retains full control …
● Interest payments on debt are tax deductible …
● Taxes are lower as interest payments are deductible …
● Accessible to businesses of any (And every) size …
Benefits to Institutions and Private Investors investing in fixed yield notes
● Investors earn a steady income …
● Interest rate is pre-decided …
● Maturity date is pre-decided …
● Return is uncorrelated to markets …
A Fixed Term with a Fixed Yield …
This investment is most appropriate when investing for the short-term to grow wealth consistently or a retired person who depends on consistent income
Secured Fixed Yield Notes (Also referred to as Private Debt/Credit notes)
In this low-risk space, private debt/credit has proven to be a source of sustainable and reliable income for investors despite ongoing uncertainty and market turbulence. Private debt/credit has become a broadly accepted category to diversify assets and is now part of many asset-allocation strategies
The offer on secured fixed yield notes
● Fixed Return: The return is known in advance by the investor (Classed as interest or profit)
● Fixed Term: The term is known in advance by the investor
Options
►Income is paid semi-annually with capital returned at end of term
►Deferred income as income is not taken by the investor, and the burrower has use of the lenders funds for longer,
the borrower in return, offers a higher return plus capital returned at end of term
►Shariah compliant paid as profit half yearly, or deferred profit plus capital is returned at end of term
Terms
● Capital Allocation: 100%, no entry, no exit or management fees
● Exit: Only at the end of the term
● Secured: Collateral security is provided over multiple properties as registered by the appointed
independent security trustee by a legal charge/lien on the title deeds of each property.
This means the security trustee who receipts investor funds and monitors investor interests can
take control of the properties if the borrower happens to default. With security over multiple
properties investors have broadly diversified collateral security.
Below find Statistics on Private Debt/Credit, Real Estate, and Infrastructure; low risk investments with a IRR 10-12% pa.
