What Are Alternative Investments?

What are Private Equity (and other alternative) Investment Funds?

While alternative assets like privately held companies can be acquired individually by business buyers, they are often bundled in an investment portfolio with similar assets into managed portfolios structured as funds. Investors purchase shares in these funds, thereby gaining a proportionate interest in the entire portfolio.

Typically, fund assets are grouped with others sharing similar objectives, reducing the risk associated with individual assets while maintaining a collective focus on a common investment objective or thesis. For instance, a private equity fund with the objective of investing in rapidly growing healthcare companies might acquire all or part of a number of high-growth healthcare businesses.

The fund structure offers several advantages for alternative investors:

  1. Diversification significantly reduces idiosyncratic investment risk.
  2. Investors gain access to assets that may require substantial capital commitments if they were to be purchased individually.
  3. Specialized managers with expertise in the asset class are incentivized to maximize returns for investors.
  4. Opportunities for periodic liquidity are often greater for fund shares compared to individual assets. This is especially true within the growing market of private equity secondary investments.

Conceptually akin to closed-end funds, alternative investment funds initially raise a predetermined amount of capital, acquire and manage assets, and are designed to self-liquidate within a specified timeframe. 

Who Sells Alternative Investments?

Until recently, the only way to invest in private equity, venture capital, hedge funds, etc. was to be a part of a large pension fund, sovereign wealth fund or large family office that has the ability to write checks upwards of $10M. However, today some funds will allow individual accredited investors to become limited partners and invest in private equity and other alternative asset classes.

What Are Examples of Alternative Investments?

“Alternative investments” refers to a wide range of investment assets that lie beyond the scope of traditional public securities like stocks, bonds, government securities, and public funds. 

Examples of alternative investments are private equity, private credit/debt, venture capital, hedge funds, infrastructure, and tangible assets.

At Raincatcher, we work with primarily with private equity firms, both representing them as we look for businesses to buy, or on the other side of the table as they are submitting bids to acquire our sell-side clients companies.

Are ETFs and Stocks Considered Alternative Investments?

Publicly traded assets like stocks and exchange-traded funds (ETFs) are not considered alternative investments.

The term “alternative investments” is for privately held and generally speaking less liquid asset classes. Alternatives are typically invested in by pension funds, sovereign wealth funds, family offices and other institutional investors. However, they are becoming more readily available to individual high net-worth, accredited investors.

How Much Should I Invest In Alternative Investments?

Accredited investors may carefully consider allocating a portion of their investment capital to alternative assets like private equity, taking into account factors such as risk tolerance, investment goals, and portfolio diversification strategy.

While private equity, and in particular lower middle-market private equity (companies with up to $15M in EBITDA) can offer potential for enhanced returns and portfolio diversification, it’s essential for investors to assess their willingness to accept higher levels of risk and commit to long-term investment horizons. The majority of these investment opportunities will lock their limited partners’ capital up for 4+ years.

What Is The Most Popular Alternative Investment?

The most popular alternative investment for accredited investors is to be a limited partner directly in a real estate investment or a private equity deal. Both of these markets are fragmented and there are many small deal sponsors that raise relatively small amounts of capital ($5M – $50M) from accredited investors.

There are plentiful opportunities for small fund sponsors (general partners) to find both small real estate opportunities and business opportunities that are available to be bought with Limited Partner (investor) money.

Many of the small private equity sponsors use Raincatcher to source and acquire platforms as well as bolt-on acquisitions for their roll-up strategy.

Related Content

Have a look at the other alternative investment related articles. We focus on providing clarity into the world of private equity and recently wrote an article to explain how a private equity leveraged buyout works.

What is a Limited Partner?

In alternative investments, a limited partner (LP) is an investor who contributes capital to an investment partnership but has limited liability and a passive role in management. Limited partners share in profits and losses but are not responsible for partnership debts beyond their investment amount.

What is a General Partner?

In alternative investments, a general partner (GP) is an individual or entity responsible for managing the investment partnership and making key investment decisions such as what assets (businesses, commodities, real estate, etc.) to invest in.

Unlike limited partners, general partners may have unlimited liability for the partnership’s debts and obligations. They take on varying degrees of active management roles in their investment firm and in the businesses in which they invest capital, including sourcing investment opportunities, conducting due diligence, and overseeing the day-to-day operations of the investment.

General partners often receive management fees and a share of the investment profits (often called carry or promote) as compensation for increasing the value of their limited partners investment.