This three-part series will cover all you need to know about alternative investments. Click below to read the next articles in the series.
- Part One – Alternative Investments – What are My Options?
- Part Two – Why Alternative Investments?
- Part Three – Alternative Investments – The Pros and Cons
When one thinks of investing, the mind quickly goes to NZX listed shares, direct property and bank deposits/bonds. These are conventional investment options.
Whilst there is nothing wrong with these, an investor should be aware of the alternative investment options that exist and the benefits they can afford. This article explains what alternative investments are and describe briefly some of the many types of alternative investment options available to investors. Part two will then discuss the benefits of alternative investments as well as some of their potential risks.
What are Alternative Investments?
The term “alternative investments” is broad.
Alternative investments are those investments which do not fall into the conventional categories of NZX shares, direct property and bank deposits/bonds.
Such investments are focused on non-conventional assets and investment strategies that can be included in any investment portfolio as a proportion of the overall total, depending on your risk/return profile.
Types of Alternative Investments
Investing in Private Companies
Private companies are the cornerstone of employment in New Zealand and make up nearly two-thirds of our economic output. The range of potential investments is large, and the risk/return profile is very wide, varying depending on what stage the business is in. There are opportunities to invest in low risk/low return opportunities and higher risk/higher return opportunities.
Access to options to directly invest in private companies has historically been quite difficult for investors. There are however many ways to invest in private companies. This can be through private offers to eligible investors arranged by Investment Banks such as Armillary Private Capital. At Armillary we make it easy and can open up a wide and rich category of investment to private investors. We have advised over 1000 companies over the last 15 years, and in a large proportion of cases, investment opportunities have been presented to private investors.
Investment sizes range from $50,000 to over $20million. We currently have a wide range of investment opportunities available for private investors, including:
- Medicinal Cannabis;
- Digital technology;
- Aged care and Retired Living;
- Information Technology; and
- Food and Beverage
These businesses range from distribution and services to manufacturing and online offerings.
Other ways to directly invest in private companies is to do so directly as an Angel Investor, or through a crowd funding platform such as Crowdsphere.
Equity crowdfunding through Crowdsphere, enables someone to invest a small amount of money in a business and receive in return a proportionate share of equity in that business. This “equity” is in the form of shares, and the investor consequently becomes a shareholder in the business. They may profit if the business does well or lose their investment if the business fails.
An Angel Investor is generally someone with a high net worth who is willing to provide finance to entrepreneurs and start-up businesses. Angel Investors typically contribute between $10,000 – $500,000 to a start-up company and usually stick with the business until it is either bought out or sold. There are a number of Angel investment networks throughout New Zealand that aspiring Angels can join.
Venture Capital and Private Equity
An alternative to directly investing in private companies directly is to invest via a Venture Capital or Private Equity fund.
Venture Capital funds typically invest between $1 – 10million in risky, non-mature businesses that are still in their early stages of growth. VC’s usually seek a return within 2-5 years. This is often procured either by selling their shareholding, or the business being sold entirely.
Private Equity firms, on the other hand, typically invest $10-200million to take a significant stake in a business. Often, they will be investing in companies that are more mature and can be used as a base to acquire further similar businesses to build scale.
For more information on Angel Investors and Venture Capitalists, see our article here.
With a hedge fund, investors pool together their resources. A hedge fund manager then invests these resources into various securities of their choosing and manages the investments. The chosen securities can be varied, reducing risk by spreading it out across a diverse portfolio. The hedge fund manager receives a cut of the profits incurred and investors are charged fees for participating in the fund.
Syndicated property does not specifically fall into the conventional investment categories of shares, bonds or cash, although it is a common, easily accessible investment. Syndicated property investments are focused on breaking down the cost of a commercial or industrial property into smaller amounts which an investor can afford. Returns usually come in the form of a fixed regular income paid by the investment entity to all investors and possibly some capital gain or loss upon sale of the asset. One key issue with syndicated property is that it is difficult to sell the investment during the life of the syndicate.
Syndicated forestry and agricultural assets fall into the same basket.
Commodities can include gold and other precious metals (a common investment option), as well as fine art, collectibles, wines, antiques and even luxury branded items like handbags! Subject to the market for the commodity and its demand, unique and rare items often appreciate over time. Key to finding a good commodity investment option is having a good eye. For example, skill and expertise is required when purchasing art, wines and antiques to ensure that their value appreciates, and the item stays in demand.
Derivatives can be a more complex area of investing, usually used by experienced investors. A derivative is a financial security whose value is derived from an underlying asset or group of assets. The derivative itself is a contract between two or more parties. A derivative gets its price from fluctuations in the underlying asset(s). Derivatives are highly complex but also highly liquid.
Common underlying assets can be shares, bonds, commodities, currencies, interest rates and market indexes.
For more information on derivatives see: Investopedia .
Cryptocurrencies (blockchain enabled currencies) continue to become more visible, with tech giant Facebook releasing its coin “Libra” in the near future. Cryptocurrencies are digital currencies which operate independently of traditional banking institutions and are encrypted to ensure secure transactions. Their increasing popularity has resulted in a call for stricter regulations for cryptocurrencies, especially because of their volatile nature.
Cryptocurrencies can be used to acquire Tokens issued by companies which can either
- a) be redeemed for future services and have features of prepayments or
- b) have the same features as shares.
If you’re interested in investing in alternative investments, please get in touch!
When thinking about alternative investments, it is useful to consider a risk/return analysis and the overall pros and cons involved. Part Two will explore the risk/return analysis for Alternative Investments.