As traditional financial instruments such as stocks and bonds have become increasingly unpredictable due to global economic fluctuations, alternative assets have surged in popularity among Australian investors.
These assets, ranging from private equity to real estate, commodities, and even agriculture, can provide a valuable hedge against volatility and a potential source of impressive returns.
However, as with any investment, it is crucial to understand the ins and outs of this emerging asset class.
To successfully invest in alternative assets, financial advisers must understand their unique characteristics, evaluate their potential risks, and structure a balanced portfolio that aligns with their client’s investment goals.
In this article, we will delve into the world of alternative assets, providing insights on effective strategies for investment success and shedding light on how investors can avoid potential pitfalls.
But before we get into that, let’s first take a trip down memory lane –
Alternative Assets – How did we get here?
Over the past few years, alternative assets have gained significant traction among investors seeking to optimise their portfolios. This can be attributed to several factors, including low interest rates, increased market volatility, and the potential for enhanced risk-adjusted returns.
But how did we get to this point?
Three words… Global Financial Crisis. The GFC was an investment game changer, for the Alternative Asset Class as well.
Before the GFC, Alternative Assets were typically bank-issued, leveraged alternative assets.
When the GFC hit, investors were left with poor-quality assets, ongoing loan repayments, and a sour taste in their mouths. Banks were left with reputational damage and a fear of returning to the leveraged alternative asset space.
Since the GFC, the new dawn of Alternative Assets has been slowly emerging.
We’ve seen property trusts, real property asset investing, and property debt grow in popularity among investors, as well as the breakthrough of crowdfunding, where investors are provided with an access point to venture capital and private, equity-like investments.
The emergence and growth of these asset types demonstrate the present day investor demand for alternative investment opportunities.
Unfortunately, not all alternative assets were created equally and these platforms don’t necessarily offer high-quality, vetted investments with appropriate due diligence.
Here are the top three tips and traps for investing in alternatives:
Tip #1 – Start Small
When getting started, it’s a good idea for investors to dip their toe in the alternative asset investing waters by investing a smaller amount initially.
This approach allows investors to evaluate the asset’s performance as well as the investment providers reporting quality and overall experience.
If the initial experience is positive, investors can then gradually increase their investment in subsequent opportunities.
Tip #2 – Make sure interests are aligned
When completing due diligence, investors should carefully assess the alignment of interests between themselves and the provider they are considering investing with.
Ideally, investors should be looking to invest with partners who have skin in the game, as they have a vested interest in the performance of the investment.
This alignment of interests ensures that the provider will work diligently to mitigate risks and enhance overall performance, purely out of self-interest.
Tip #3 – Don’t sign that dotted line
… unless you know the documentation is watertight.
When it comes to alternative asset investments, the devil is in the details which is why the documentation plays such a critical role.
Investors need to ensure that all terms and agreements are accurately drafted and documented by reputable legal firms. Well-drafted documentation protects investor interests and ensures that the investment operates as expected.
Trap #1 – Not reading the fine print
All alternative asset investments should be accompanied by some form of prospectus or disclosure document. If this is not provided, investors should run, not walk, away from this investment.
Investors should review the offer documents to ensure they fully understand the investment, including the risks. A comprehensive risk section is crucial, as it demonstrates the issuer’s competence and transparency.
Additionally, investors should pay particular attention to the security position of the investment to avoid any unexpected risk exposure.
Trap #2 – Getting stuck footing the bill
Investors need to scrutinize the fee structure and assess whether they are reasonable and aligned with industry standards.
It’s a red flag if investors are lugged with paying all the fees, instead of the capital raiser.
Also, investors need to be cautious of undisclosed fees and conflicts of interest. Conflicts may arise if the capital raiser benefits from undisclosed equity on top of the disclosed fees, which can compromise investor returns.
Trap #3 – Not having an exit strategy
An exit strategy is one of the most critical parts of investing and involves knowing upfront how you will exit an investment and how you will get your money back.
Investors should ensure they have a thorough understanding of the investment maturity, including any terms and conditions relating to potential extensions, which could result in a prolonged investment period.
They will also need to consider the likelihood of the proposed exit strategies, such as refinancing, sale to a third party, or an initial public offering (IPO), and assess their feasibility and potential risks.
If you noticed a core theme here, you’d be right. The key to successful investing in alternative assets ultimately lies in the due diligence.
When dealing with alternative investments, advisors need to ensure extensive research and due diligence is undertaken, including:
• Having a comprehensive understanding of the investment structure and the entities involved.
• Understanding the underlying assets, fees, liquidity terms, and regulatory frameworks.
• Evaluating the track record, expertise, and reputation of the investment group, as well as the legal, auditing, and accounting entities associated with the investment.
• Knowing the potential risks and understanding the providers risk management practices.
Alternatively, you can choose to partner with a team whose expertise lies in creating win-win outcomes for investors and capital raisers, protecting investor’s interests, and structuring investments in a way that is profitable for all parties involved.
This article is based on the new book written by Travis Miller, co-founder and joint Managing Director of iPartners “Grow your wealth faster with Alternative Assets”
This book offers a complete guide to this new universe of investment opportunities.
If you’re interested in learning all there is to know about investing in alternative assets, reach out to ir@ipartners.com.au and receive over 50% off the purchase price of Travis’ new book.
