21 MAY | WEALTHY INVESTORS’ AFFINITY FOR ALTERNATIVES

Since the onslaught of the Covid-19 pandemic, there has been a massive upswing in interest in private investments.

  • According to a recent article in Institutional Investor, a majority of institutional investors were set last year to increase allocations to alternative assets.
  • According to Natixis Center for Investor Insight cited in the same article, 37 percent of investors were planning to increase exposure to private debt in 2020, while 28% intended to increase their investments to private equity,

Tired of being Wall Street’s punching bags, investors are turning to Wall Street alternatives in the private markets to take their financial fates out of the investing public’s hands.

Wealthy individual investors and institutional investors stopped being Wall Street’s chumps long ago and have always turned to alternatives to avoid market volatility and to be insulated from recessions.

Short-term disasters don’t faze these investors because they invest around 10-year windows.

Wealthy investors know Wall Street’s realities – that the odds are stacked against them for building consistent wealth.

Why?

It’s because Wall Street companies aren’t built to reward the ordinary investor.

There are three main categories of Wall Street companies – all offering unsatisfying results to the ordinary investor:

IPOs – The only people getting rich from IPOs are the venture capital firms that funded them through the going public stage.

Most of these IPOs have already had their upside stripped upon going public – rewarding the various private equity groups that sponsored them. When these IPOs go public, very few of them succeed in providing any of their initial public investors any significant return.

Heavily Leveraged Companies – The next category of companies involve companies with a long history of non-profitability and large debt loads.

These are dead companies walking that manage to keep hanging around. They will never provide their investors with any future cash flow.

Established Companies – Established companies with a stable operating history can provide investors with consistent cash flow, but the dividends often don’t outpace inflation and aren’t immune to market volatility.

Companies always give themselves an out when it comes to paying dividends so that when the going gets tough, they have an out clause for not paying them. This is why wealthy investors are unsatisfied with Wall Street returns and turn to the private markets.

With 10-year investment windows, wealthy investors are willing to give up liquidity for:

  • Above-market returns.
  • Non-correlation to Wall Street.
  • Consistent income stream.
  • Management transparency.
  • Long-term growth.
  • Expert and efficient management.

Preferred Alternative Segments
Although alternative assets cover broad categories of investment options, the wealthy have an affinity for cash flowing private equity and private debt.

Along with income and growth, these assets offer inflation-hedging and volatility insulating benefits common among all alternative assets.

The Liquidity Argument
Wealthy investors understand that only a lucky few make money on Wall Street. Like the lucky cat at the craps table, there’s the occasional winner on Wall Street that timed a shift right.

For most, however, Wall Street volatility breeds a climate akin to a lottery where the money is made based on speculation and not on sound financial fundamentals.

Wealthy investors prefer certainty, fundamentals, and discipline. All these elements combine to create cash flow and growth built on sound economic principles.

Off-Market Opportunities
Unlike Wall Street, private markets are inefficient markets – meaning there still exist advantages to be gained from information advantages, including familiarity with local markets and with particular alternative asset classes.

Alternative markets are inefficient markets, and that’s why wealthy investors have an affinity for alternative investments.

They allow for the leveraging of superior management experience, knowledge, and informational advantages to provide above-market returns.

Invest like the wealthy who have an affinity to alternative assets.

Follow this path:

  • Flee Wall Street for private markets.
  • Insist on cash flow.
  • Seek alternative segments that would thrive in a downturn.
  • Partner with a management team to obtain informational and geographical advantages.
  • Invest in established industries with a track record of success.

Further reading

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