Alternative assets – including private equity, venture capital, private debt and hedge funds – have exploded in popularity over the past decade among big institutional investors and ultra-high-net-worth individuals.
The reasons for this are straightforward. Over the past decade and a half and across a range of different asset classes, investment portfolios that included investments in the private capital markets have often out-performed purely public market exposure in terms of both return and risk.
Now newly emerging technologies are putting private capital markets and alternative assets in the hands of a far broader pool of investors.
If you are one of these investors, this raises an important question: what are the critical things to know if you are interested in making the plunge?
In this post, we will explore the five key things to keep in mind.
Access To New Opportunities
It has been said that today’s high growth startups are tomorrow’s unicorns. There is truth to this – but high-growth tech startups are only one of the many choices available in the private capital markets.
Indeed, alternative assets cover a wide range of opportunities and choices that are simply not available in the public markets. Examples include hedge funds, asset-backed securities, private debt and, yes, private equity in wide range of companies. You will also have access to other asset classes as well, such as real estate opportunities in logistics hubs, data centres, green energy generation and transmission and more.
The bottom line is that there is an incredibly wide range of opportunities -- enough to cover virtually every investor’s interests and style.
You Can (And Should) Customize Your Risk-Reward Ratio
The idea that private capital markets and alternative assets are exclusively ‘high risk/high reward’ is not really accurate. That is to say, it does not really give you a full picture. To be sure, there is plenty to capture the interest of even the most aggressive investor out there, but these are only some of the many choices available. Options abound, including many that are as safe – if not safer – than many publicly available securities. Additionally, many alternative assets can provide protection from the volatility of the public markets as well as a good rate of return.
With alternative assets you can -- and should -- customise your portfolio’s risk-reward profile in ways that work for your goals, needs and strategy.
Be Aware Of Lockups
Lockup periods – or set amounts of time during which investors are not allowed to sell or redeem shares of a particular investment – are quite common in the private capital markets, particularly for asset types like hedge funds and startup equity shares.
The average lockup time of a private equity fund, for example, can be around eight to ten years. Obviously, this can be a huge adjustment for those just coming in from the ultra-liquid public financial markets.
It should be noted, however, that lockup is not a hard and fast rule. Emerging fintech players now exist that facilitate issuances with no lockup period at all. In the case of iSTOX, for example, this includes a fully integrated secondary market where you can buy and sell your investment at any time.
Why Do I Have To Pay All These Fees?
You can expect to pay a significantly higher amount in fees when accessing private capital markets. The reasons for this are varied and range from high labour costs involved in creating and maintaining the investments to a lack of competition comparable with the public markets as a force to drive down costs.
The bottom line, however, is you will want to factor these fees in when considering any alternative investment.
As with lockups, this is also starting to change. Technology now exists to streamline and automate the private capital market issuance and trading process and thus reduce costs (and fees).
Access Is Easier Than You Think
Getting access to private capital markets does comes with some restrictions – but not nearly as many as there used to be.
As noted above, private capital markets have traditionally been the preserve of large institutional investors and very well-connected ultra-high-net-worth individuals or family offices. Other players – particularly those at lower net-worth levels - have been locked out until very recently.
This too, is starting to change, however. By drawing on emerging technologies like smart contracts, digitised securities and cloud technology, emerging fintech platforms (such as MAS-regulated iSTOX) are dramatically opening access and bringing down the cost of private capital markets investing. iSTOX, for example, is open to those that meet any of the following criteria:
Have a total income of at least S$300,000 a year, or
Have a net worth of at least S$2 million (of which a maximum of S$1 million can be derived from the value of his/her primary residence), or
Have net financial assets of at least S$1 million.
Start exploring your opportunities on iSTOX now.