Alternative Investments are Going Mainstream
There is pent-up demand for alternative investments, and that demand is only gathering momentum. The amount of assets invested in alternative assets is at an all-time high and is only expected to keep climbing higher.
First, what are alternative investments? Generally speaking, an alternative investment is an asset that’s not a public stock, bond, or cash.
Practically speaking, there are only two segments of alternative assets that sophisticated investors are interested in: ownership in private companies (private equity, venture capital) and private real estate (non-REIT real estate investments).
Why are alternative investments going mainstream? More specifically, why are private investments in real estate and companies becoming more and more popular? The rise in private investments can be attributed to what they bring to the table and their accessibility. And what they bring to the table is they pay better than stocks and bonds and, in the right hands, do so at less risk.
The SEC knows the value of private investments and has recently gone through great lengths to make private investments more discoverable and accessible to more investors. Many of the SEC changes have been to Reg D.; the predominant rule entrepreneurs rely on to raise money through the private markets to avoid the costs of going public.
One of the significant recent changes to Reg. D was the loosening of the advertising restrictions imposed on private offerings. This was game-changing because historically, as the name implies, private investments were precisely that – private. Investors only came across private offerings (i.e., private placements) by word of mouth, and it was usually only the wealthy and the connected that were privy to these communications.
Early private investment opportunities in alternatives can be traced back to the railroads in the 1800s. Still, they became more prominent in the rebuilding aftermath of World War II as venture capital firms popped up to raise money for investment in new technological advances, sprawling residential and commercial real estate development, and other entrepreneurial opportunities.
Those lucrative private equity and real estate opportunities were exclusive to the rich, and they took advantage of these opportunities – with most ultra-high-net-worth investors (having more than $30 million net worth) allocating a majority of their portfolios to private equity and real estate.
The SEC recognized the value of these private investments and wanted to make them more available and accessible to more investors. In fact, In a speech given last year at the PLI Investment Management Institute 2020, Dalia Blass, the Director of the Division of Investment Management at the SEC, suggested that Main Street investors needed more access to private markets because “Private investments have the potential to provide stronger returns and diversification for investors…”
Data shows the value of private investments in a portfolio. The more allocated a portfolio is to private investments, the higher the average annual return. It’s no wonder the ultra-wealthy are heavily allocated to private investments while the middle class who are stuck in a rut and at their jobs continue to blindly follow the average Wall Street 60/40 allocation of 60% stocks/40% bonds.
Besides loosening the restrictions on advertising, the SEC has also instituted Regulation CF (crowdfunding) to allow for more investors who would not otherwise qualify to invest in other private offerings because of accreditation status and also expanded the categories of investors fitting within the definition of an Accredited Investor to open up more opportunities to more investors.
Of course, none of these regulatory changes would matter if the opportunities that were opening up weren’t pursuing. Still, investors have latched onto private alternative investments because they’re discovering the advantages of private alternatives that stocks and bonds don’t offer, including higher above-market risk-adjusted returns, cash flow, appreciation, tax breaks, and an inflationary hedge.
As with any other up and coming trend, with the mainstreaming of alternative assets, it’s better to get in sooner than later to take advantage of the time value of money for reinvesting cash flow and compounding appreciation to create, build and maintain wealth. Main Street investors finally have the chance to invest like the wealthy, but the spoils will only go to those with the courage to take the plunge.