Whether you’re a portfolio manager or an investor who’s curious about alternative investments, learn about the value of a diversified portfolio and the investment opportunities that come with alternative assets such as venture capital, private equity and real estate. Pic: Via Getty Images
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Are you curious about how alternative assets can help you diversify your investment portfolio?
As an investor, you always want to explore different investment options to diversify your portfolio and offer potentially high returns. Mitigating risk in investing is all about spreading your assets. Just like the old saying “don’t put all your eggs in one basket,” having a diversified portfolio means that if one basket were to break, you’d still have plenty of others to keep you in the black.
To diversify your portfolio, it’s best to select investments from various industries and markets. Whether you’re a portfolio manager or an investor who’s curious about alternative investments, learn about the value of a diversified portfolio and the investment opportunities that come with alternative assets such as venture capital, private equity and real estate.
An alternative investment is a financial asset that isn’t stocks, bonds, or cash.
Alternative investments (also known as alternative assets) are typically illiquid—meaning you can’t easily sell them or convert them into cash. They used to be limited to high-net-worth and institutional investors, but are now becoming more mainstream and more accessible to the everyday investor.
Analysts expect the alternative investment industry to grow 59% by 2023, reaching $14 trillion in assets under management. One reason behind this momentum is that investors are looking for more asset classes to diversify their portfolios. Alternatives offer lower correlation to the market than traditional asset classes, hence their appeal.
The list of alternative assets is long but the four main types of investments are:
Private equity is equity or ownership not listed on a public exchange. Private equity firms raise funds from both non-institutional and institutional investors and use these funds to purchase equity in a business with the goal of later selling it for profit. Depending on what stage the company is in, private equity can come in the form of:
Real estate is the world’s biggest asset class and is typically known as an alternative asset when individuals purchase property such as office buildings or residential apartments as investments.
Investors who don’t want to be landlords might put their money into a real estate investment trust (REIT). A REIT manager will invest their money in different properties as well as manage and collect rent on those properties. Investors will earn annual profits as dividends, or a share in the properties’ profits.
VentureCrowd offers some unique real estate ventures, you won’t find elsewhere. First up, invest in the high-growth, under-supplied suburb of Cannon Hill, QLD and earn a targeted ROI of 40% over an 18-month term. This property fund offers wholesale and pre-approved investors the chance to purchase equity in the development of an architecturally designed, multi-residence apartment project. With development approvals in place for 45 apartments over four stories and an estimated project completion date of March 2024, this is an opportunity you won’t want to miss.
Alternatively, invest in one of Australia’s strongest growth suburbs, Carrara, QLD, and earn passive income with interest paid monthly in arrears over a 24-month term. With two investment options available, you can choose to earn a targeted 14.5% p.a. or reinvest your interest for higher ROI. Plus, with 80% of the land being rehabilitated as a public conservation space, you can feel good about investing in a socially responsible project.
For something different, consider the Albany Creek Property Fund, which enables investors to purchase preference equity in the development of a residential property development project at Albany Creek, Queensland. With construction already underway and all necessary approvals in place, this is a secure investment opportunity with a target return of 14.5% p.a. paid monthly in arrears.
Private debt refers to loans that are typically made by non-bank investors. For example, when a company is looking to grow its business, it may not have the money or assets to expand. Instead, it might take on private debt, or receive a loan from a private debt fund, as an alternative to bank lending. Institutional investors have increasingly turned to private debt as a source of diversified returns.
Hedge funds use pooled funds to invest in alternative assets or strategies. Hedge funds are exclusively for high-net-worth individuals and institutional investors, with most hedge funds investing in traditional securities such as stocks, bonds and commodities. Impact investing is a sustainable and competitive strategy for hedge funds. An impact hedge fund is an investment fund that specifically seeks to support beneficial social or environmental outcomes, in addition to generating financial returns.
Alternative investments differ from traditional asset classes by aiming to seek returns in non-traditional-style investments. These assets typically have higher minimum investments and fee structures yet lower liquidity compared to traditional-style assets because of the type of assets they hold. Alternative investments can help provide diversification to a portfolio as they usually have a low correlation with standard asset classes (as one investment asset class rises in value another will decrease in value). Like any investment, the rate of return for alternatives is not guaranteed, but there is potential for it to be higher than that of traditional investments.
All venture capital is private equity, but not all private equity is venture capital. Confused? Don’t be! Let us break it down: Private equity is funding for businesses yet to be listed or traded. Venture capital is funding for start-ups or early-stage ventures. Note that as private equity means investing in privately owned businesses for equity, venture capital is technically a type of private equity. The main difference is that, while private equity investors prefer stable companies, VC investors usually come in during the startup phase.
Private equity and venture capital buy different types of companies, invest different amounts of money, and claim different amounts of equity in the companies in which they invest. While venture capital investment tends to be riskier, investors get involved because of the potential for very high returns.
Venture capital benefits:
Private equity benefits:
While the risk profile of private equity and venture capital investment is often higher than other asset classes, the returns have the potential to be notably higher as well. Investing in private equity can provide diversification to an investment portfolio, as private investments’ value may be less correlated with the stock market. Similarly, investing in venture capital can provide diversification to an investment portfolio, as early-stage companies may increase in value faster than the stock market. To manage the risk associated with VC and PE, investors must conduct their due diligence and work with an expert financial advisor to help them make informed decisions by understanding risk vs reward of each investment opportunity.
Real estate investing involves the purchase, management and sale or rental of real estate for profit. One of the key ways investors can make money in real estate is to become a landlord of a rental property. However, investors can also use a real estate investment trust (REIT) to provide indirect real estate exposure without the need to own, operate, or finance properties. Similarly, real estate mutual funds invest primarily in REITs and real estate operating companies to help investors gain diversified exposure to real estate with a relatively small amount of capital.
Investing in real estate as an alternative asset might provide high yields and increase overall income levels in a portfolio. Real estate can also improve overall returns because property is an alternative asset that acts as a hedge against inflation. Whether you invest in commercial or residential real estate, Investment properties can bring much-desired passive income along with the ability to leverage funds, receive tax benefits, protect against inflation and make a difference in your community by providing homes for renters or bringing local businesses to commercial properties.
Real estate can enhance the risk-and-return profile of an investor’s portfolio, offering competitive risk-adjusted returns. The real estate market is one of low volatility, especially compared to equities and bonds. Real estate investment has always been known as a ‘sound’ investment. Still, like with all investments, investors need to adapt to uncertainty and risk through careful asset selection, diversification and the right pricing of long-term risk.
Impact investing is an investment strategy that aims to generate positive and measurable social and environmental impact alongside financial return. You can find impact investment opportunities among a range of asset classes in many industries including agriculture, food, healthcare, education and science.
Impact investments target financial returns that range from below market to risk-adjusted market rate and you can invest across asset classes, including cash equivalents, fixed income, venture capital, and private equity.
The global impact investing market was valued at $2.5 trillion in 2021 and is projected to reach $6 trillion by 2031. This is primarily driven by ethical investors who want to know that their money is “doing good” and contributing to a better world.
ESG investing is based on environmental, social, and governance considerations and has become a popular form of investment alternative. A strong ESG deal can enhance investment returns by allocating capital to more sustainable opportunities or practices, for example:
Many ESG investment vehicles have emerged, including green bonds, mutual funds, ETFs, and index funds (among others).
VentureCrowd backs startups and high-growth ventures that are making a positive impact and has a strong network of partners focused on curating impact investing opportunities and managing funds for early-stage ventures that are making a difference whether locally or on a global scale.
Impact investing has the obvious benefit of allowing investors to make a positive difference. It gives you the chance to align your financial goals with your values and essentially make your money work for you. Impact investing can also reduce your risk because you can diversify your investment portfolio. Also, by supporting companies and industries in worthwhile causes, you provide increased opportunities for social enterprises to gain funding.
One of the key risks is that impact investments may not generate the intended social or environmental impact. Another risk is that financial returns may be lower than anticipated, depending on the type of impact investment. However, many impact investments have generated strong financial returns, and there is increasing evidence to suggest that companies focusing strongly on social and environmental issues may be better long-term investments.
Introducing VentureCrowd
VentureCrowd is Australia’s leading digital investment platform for alternative assets.
We offer investment opportunities for retail and wholesale investors in curated high-growth private companies and property development funds and give investors access to a diversified portfolio of alternative assets to decrease their overall risk profile and increase their returns.
VentureCrowd’s secure platform allows for 24/7 online investment management and monitoring through a simple dashboard where you can login, view your current investments and see how they’re tracking and discover a range of meaningful opportunities that are good for you, the crowd and the planet.
Our teams have deep expertise in venture capital, investor relations, funds management, compliance and technology. We have helped fund over 70 ventures through our digital investment platform and provide over 72,000 investors with impactful opportunities to shape the future.
You can’t afford to not diversify
Diversifying your portfolio with alternative investments can offer high-net-worth individuals access to unique investment opportunities with potentially high returns. Explore alternative investment opportunities today and join the crowd of investors who are investing in impactful opportunities with VentureCrowd. View our VC property deals and Venture deals, and book a call with one of our capital managers today.
This article was developed in collaboration with VentureCrowd, a Stockhead advertiser at the time of publishing.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.
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