Alternative world

Alternative assets like private equity, private debt, infrastructure and commodities are a different kind of investment to conventional shares and bonds. At Craigs, we have recently introduced alternatives as a new asset class for our clients.

For many years, alternative assets were the domain of only large investors like sovereign wealth funds and university endowment funds.

However, times are changing.

We’ve seen the emergence of new types of alternative products and fund managers are also offering smaller investors access to alternative assets. This is a positive development and one we are embracing.

Why invest in alternatives?

Alternatives offer investors access to private market assets, which are not available in the public markets and can enhance portfolio diversification. An example of a private market asset is Elon Musk’s rocket company, SpaceX.

Holding alternatives that behave differently to public assets can offer protection against losses and smooth portfolio ups and downs because these assets do not trade in lockstep with listed shares and bonds already in the portfolio. This is comforting for investors.

Investors concerned about inflation may find solace in infrastructure and commodities. Historically, these assets have been effective at protecting portfolios against inflation.

Other alternatives can be used to enhance returns.

Private credit (for example, non-bank lending to businesses) can boost the income generated by a portfolio.

Private equity is suitable for investors seeking higher returns, provided they have a tolerance for risk. It’s worth noting that many companies are now staying private for longer and some may never go public. Nasdaq reported research that shows businesses have delayed listing from a median of six years in 1980 to eleven years in 2021. These companies are choosing to partner with private investors over the traditional path of an IPO (initial public offering).

Important considerations

While there are many reasons to invest in alternative assets, some important considerations are outlined below.

Many (but not all) of the products that invest in alternatives are illiquid, meaning investments cannot be as easily converted to cash as assets available in public markets. For example, private equity funds may require investors to commit for a period of ten years or longer. Returns are sometimes not seen for the first five years.

Management fees are typically higher for alternatives than more traditional asset classes. While investors should be mindful of fees, it’s ultimately net returns after fees that matter.

Minimum investment amounts are often specified, which can be high and create a barrier to access for investors.

Finally, alternatives can be complex to understand and information disclosure is more limited than it is for publicly-listed assets.

How to invest

Retail clients can now access alternatives through products known as ‘evergreen’ funds.

Evergreen funds give investors the ability to enter or exit their investment positions at monthly or quarterly time intervals (although maximum redemption limits may apply). This liquidity is a significant improvement on traditional closed-end funds, which do not have this feature.

Furthermore, minimum investment amounts are generally lower for evergreen funds and money is fully invested upfront, rather than being called over several years.

These structural enhancements have made alternatives accessible to a broader range of investors.

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