Alternative investments
Alternative investments
Podcast
30.11.2023
Whether due to expected returns or as an element for broader portfolio diversification - alternative asset classes have long been an essential part of a well-positioned wealth. In various asset classes, investors can find various ways to implement their investment strategies in a targeted manner in the mostly illiquid opportunities.
In the following, we would like to give you an overview of these options and discuss the question of which target groups, requirements and values can be addressed by the various asset classes.
Private equity is probably the most present alternative asset class. As with equity investments, these are investments in companies. In contrast to its liquid counterpart, private equity investments, unlike shares, are direct entrepreneurial investments that are not publicly tradable. Private equity funds prefer to acquire majority stakes in companies in order to be able to actively influence their performance. The fact that a private equity investor influences the entire value chain and is accompanied by a certain degree of illiquidity leads to a higher expected return compared to shares.
Those who invest here hope to make a positive contribution to real value retention on the one hand and to reduce risk at the overall asset level on the other. In return, private equity investors are prepared to bear the entrepreneurial risk as well as illiquidity for this portion of the total assets. Traditionally, investors have included large foundations, such as Yale University, and family offices. Nowadays, however, wealthy private individuals are also increasingly using private equity to broaden their portfolio wealth.
Venture capital funds are very similar to private equity funds and are subject to similarly illiquid framework conditions. They also make targeted investments in companies, but deliberately focus on innovative technologies and concepts. Their focus is therefore increasingly on developing and shaping start-ups and young companies that have the potential to change the market in the long term. Unlike more mature private equity investments, venture capital funds usually take minority stakes. The capital invested is used directly to enable rapid growth.
Venture capital has a higher risk profile compared to private equity due to the earlier development stages of the companies invested in. However, in the event of success, it is hoped that this will be offset by higher potential returns. Investors in this asset class generally have an affinity for risk, are prepared to tie up the invested amount and often have experience at start-up and management level themselves. These funds are also interesting for investors who want to participate in the markets of the future today.
Impact investments deliberately focus on ethical, social or environmental issues and aim to achieve a measurable impact in addition to an attractive return. Examples include the promotion of renewable energy, education, poverty reduction, healthcare and research. Although investors were often skeptical of this investment class in the past due to its philanthropic objectives, these concerns have now largely been dispelled. The implementation can take place via investments in the style of private equity and venture capital and is accompanied by an equivalent expected return.
Basically, there are two main motives for impact investing. The first is the idea of value. This is about investors who explicitly want to achieve a positive impact with their allocation. This often includes younger wealthy people or foundations that follow strict guidelines when investing capital. Impact investing could also be of interest to those who want to consciously invest in the transformation of society and the economy. Issues such as climate change and the energy transition have long since become a necessity for the general public. Accordingly, they offer attractive long-term development opportunities.
Private debt describes private lending - usually to fast-growing medium-sized companies. In contrast to private equity, the return here is based on contractually fixed interest income and fees with fixed terms, which ensure greater predictability. At the same time, the higher repayment priority of debt capital compared to equity capital leads to a different risk profile.
The combination of these special features with the independence of the asset class from other market events makes them interesting for a broad target group. Investors use them on the one hand to diversify and thus spread the risk in their portfolios, and on the other hand as a liquidity planning tool.
In contrast to private equity and comparable funds, hedge funds are significantly less regulated and are often largely free to choose the asset classes they invest in. They pursue complex trading strategies aimed at achieving positive returns independent of the market and active risk management. For example, they can take short positions to profit from falling prices or use derivatives.
Investors in hedge funds are often looking for an income opportunity regardless of the current market situation. Due to the complexity of the asset class, careful selection of potential managers is highly advisable. It is particularly suitable for experienced investors who value active risk management, broad diversification and higher expected returns. Another factor to consider is the high level of exclusivity of the managers. FINVIA, for example, offers access to hedge funds from a minimum allocation of EUR 500,000, whereby the allocation should usually only represent a single-digit percentage of wealth .
Infrastructure investments are illiquid funds that invest in society itself. The aim is to promote potential, create jobs, increase economic growth or strengthen public safety and health. This often involves investing directly in physical assets such as bridges, roads, airports, hospitals or water and electricity supply facilities. Due to their necessity and the fact that they are usually made by public-sector clients, allocations in this area are considered comparatively safe and also offer predictable and inflation-proof cash flows.
Thanks to their general indispensability, infrastructure investments are of interest to a large target group. Their low risk coupled with the special protection against inflation makes them an excellent addition to a large number of portfolios. At the same time, many appreciate the investment in physical assets and the stability of this asset class.
Although certain asset classes may appear more attractive to individual investors than others, it is advisable not to focus exclusively on one. At the end of the day, it is always advisable to make a broad selection and to structure the ratios according to your own requirements and possibilities. At the same time, there are also major differences in quality and access regulations within the respective sub-categories, which should be given sufficient consideration. Therefore, regardless of your preferences, take enough time to thoroughly examine opportunities or consult external experts such as asset managers or a family office.
Alternative investments
30.11.2023
Florian Reichenbach
From private equity and venture capital to impact investing - alternative investments are diverse. But which asset class actually appeals to which target group?
Whether due to expected returns or as an element for broader portfolio diversification - alternative asset classes have long been an essential part of a well-positioned wealth. In various asset classes, investors can find various ways to implement their investment strategies in a targeted manner in the mostly illiquid opportunities.
In the following, we would like to give you an overview of these options and discuss the question of which target groups, requirements and values can be addressed by the various asset classes.
Private equity is probably the most present alternative asset class. As with equity investments, these are investments in companies. In contrast to its liquid counterpart, private equity investments, unlike shares, are direct entrepreneurial investments that are not publicly tradable. Private equity funds prefer to acquire majority stakes in companies in order to be able to actively influence their performance. The fact that a private equity investor influences the entire value chain and is accompanied by a certain degree of illiquidity leads to a higher expected return compared to shares.
Those who invest here hope to make a positive contribution to real value retention on the one hand and to reduce risk at the overall asset level on the other. In return, private equity investors are prepared to bear the entrepreneurial risk as well as illiquidity for this portion of the total assets. Traditionally, investors have included large foundations, such as Yale University, and family offices. Nowadays, however, wealthy private individuals are also increasingly using private equity to broaden their portfolio wealth.
Venture capital funds are very similar to private equity funds and are subject to similarly illiquid framework conditions. They also make targeted investments in companies, but deliberately focus on innovative technologies and concepts. Their focus is therefore increasingly on developing and shaping start-ups and young companies that have the potential to change the market in the long term. Unlike more mature private equity investments, venture capital funds usually take minority stakes. The capital invested is used directly to enable rapid growth.
Venture capital has a higher risk profile compared to private equity due to the earlier development stages of the companies invested in. However, in the event of success, it is hoped that this will be offset by higher potential returns. Investors in this asset class generally have an affinity for risk, are prepared to tie up the invested amount and often have experience at start-up and management level themselves. These funds are also interesting for investors who want to participate in the markets of the future today.
Impact investments deliberately focus on ethical, social or environmental issues and aim to achieve a measurable impact in addition to an attractive return. Examples include the promotion of renewable energy, education, poverty reduction, healthcare and research. Although investors were often skeptical of this investment class in the past due to its philanthropic objectives, these concerns have now largely been dispelled. The implementation can take place via investments in the style of private equity and venture capital and is accompanied by an equivalent expected return.
Basically, there are two main motives for impact investing. The first is the idea of value. This is about investors who explicitly want to achieve a positive impact with their allocation. This often includes younger wealthy people or foundations that follow strict guidelines when investing capital. Impact investing could also be of interest to those who want to consciously invest in the transformation of society and the economy. Issues such as climate change and the energy transition have long since become a necessity for the general public. Accordingly, they offer attractive long-term development opportunities.
Private debt describes private lending - usually to fast-growing medium-sized companies. In contrast to private equity, the return here is based on contractually fixed interest income and fees with fixed terms, which ensure greater predictability. At the same time, the higher repayment priority of debt capital compared to equity capital leads to a different risk profile.
The combination of these special features with the independence of the asset class from other market events makes them interesting for a broad target group. Investors use them on the one hand to diversify and thus spread the risk in their portfolios, and on the other hand as a liquidity planning tool.
In contrast to private equity and comparable funds, hedge funds are significantly less regulated and are often largely free to choose the asset classes they invest in. They pursue complex trading strategies aimed at achieving positive returns independent of the market and active risk management. For example, they can take short positions to profit from falling prices or use derivatives.
Investors in hedge funds are often looking for an income opportunity regardless of the current market situation. Due to the complexity of the asset class, careful selection of potential managers is highly advisable. It is particularly suitable for experienced investors who value active risk management, broad diversification and higher expected returns. Another factor to consider is the high level of exclusivity of the managers. FINVIA, for example, offers access to hedge funds from a minimum allocation of EUR 500,000, whereby the allocation should usually only represent a single-digit percentage of wealth .
Infrastructure investments are illiquid funds that invest in society itself. The aim is to promote potential, create jobs, increase economic growth or strengthen public safety and health. This often involves investing directly in physical assets such as bridges, roads, airports, hospitals or water and electricity supply facilities. Due to their necessity and the fact that they are usually made by public-sector clients, allocations in this area are considered comparatively safe and also offer predictable and inflation-proof cash flows.
Thanks to their general indispensability, infrastructure investments are of interest to a large target group. Their low risk coupled with the special protection against inflation makes them an excellent addition to a large number of portfolios. At the same time, many appreciate the investment in physical assets and the stability of this asset class.
Although certain asset classes may appear more attractive to individual investors than others, it is advisable not to focus exclusively on one. At the end of the day, it is always advisable to make a broad selection and to structure the ratios according to your own requirements and possibilities. At the same time, there are also major differences in quality and access regulations within the respective sub-categories, which should be given sufficient consideration. Therefore, regardless of your preferences, take enough time to thoroughly examine opportunities or consult external experts such as asset managers or a family office.
About the author
Florian Reichenbach
Florian Reichenbach is a Family Officer at FINVIA and the first point of contact for our prospective clients as well as being responsible for the holistic management of our mandates.
After training as a banker at Sparkasse Freiburg and a stint at Commerzbank in London, Mr. Reichenbach studied economics in Freiburg and Australia. Before joining FINVIA, Mr. Reichenbach worked for more than six years in various roles for the digital asset manager LIQID in Berlin, most recently with a focus on managing complex mandates in the context of wealth management and alternative asset classes.
