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A Shallow Dive Into Alternative Investments

In what has been a limited but quite eventful career in finance, I frequently get asked by people how they should invest their money. As in most cases, there is no “one size fits all” answer to that question. The phrase “It depends” is used quite often in our company as many factors must be considered before making an investment decision. Warren Buffett might tell you to invest in a low-cost index fund and leave it alone for 30 years. Others may say that cash is king and to stick it under your mattress. Still, others may say to buy the newest Crypto-Token-NFT-Chain (I know that is not a real thing). The answer is rarely as simple as any of these options I mentioned, and I spend the majority of the day trying to answer what seems like a simple question, “How do I invest this money?” If you have paid attention to just about any type of media lately, you know that the stock market is not having its best run this year. With inflation at the highest level in 40 years and the Fed hiking interest rates three times already, and likely another next month, there does not seem to be a good answer to how to invest in these tumultuous times. Not since 1994 have we seen negative returns in both the stock and bond market, and cash is losing purchasing power due to the high inflation. So where do you hide? One such possibility is becoming more and more relevant and, fortunately, more available to investors. This is what the investment world calls Alternative Investments.

What are Alternative Investments

Alternative Investments are considered financial assets that do not fall into one of the conventional investment categories, such as common stocks, bonds, and cash. Sometimes called the private market, alternative investments cover many different categories such as private equity, private debt or credit, real estate or real assets, hedge funds, venture capital, futures, derivatives, and so forth. Alternative Investments (Alts) attempt to have the same outcome as public markets as they seek to generate return, provide growth, and protect assets while diversifying investments from the public market. Often, these investments have a low correlation to the public market allowing; many have less volatility than public markets and a lower risk profile in a portfolio. Until recently, Alternative Investments were only available to institutional investors and not the retail market. Regulatory changes and innovations in products and services have opened the world of Alts to a much broader market. In the past, retail and even high net worth investors had limited access to Alts due to high investment minimums, liquidity limitations, and accreditation requirements, however, a shift in focus has allowed a much larger number of investors to qualify and benefit from private investments. In many cases, investment minimums have declined, subscription processes have become more streamlined, and funds have even begun trading on the open market, albeit they are usually less liquid than your normal stocks or ETFs and may still have a hold period for liquidation. Investors are now able to differentiate their portfolios even further by using Alternative Investments as a standard in their investment process.

Why Invest in Private Markets

In current market conditions, it is now more important than ever to consider investing in private markets as valuations are fundamentally driven and not as impacted by market sentiment. In other words, news cycles, social media, and CEO popularity have much less impact on the companies’ valuations than those available in public markets. Through the use of private equity investments, companies are able to stay private much longer, without needing the investment from joining the public markets, and investors are able to benefit from a longer duration in the private market – kind of a chicken and egg situation. Much economic growth is now taking place in private markets as IPO’s are reaching the market at increasingly higher valuations, often leaving less potential for investment return once a company does go public.

  1. Source: National Venture Capital Association. Data as of 12/31/19. 
  2. Source: Journal of Applied Corporate Finance. Private Equity and Public Companies.  “The Growing Blessing of Unicorns: The Changing Nature of the Market for Privately Funded Companies.” Keith C. Brown and Kenneth W. Wiles, University of Texas at Austin. Sample set was determined as follows: The demographic and financial characteristics for sets of active unicorns at two different points in time: August 31, 2015 (the sample from our original study) and March 1, 2020. As before, to be included in either sample, a company must satisfy the following conditions: (1) have always been private; (2) have received at least one funding round of institutional capital; (3) not be a divisional buyout of a public company; and (4) have an estimated market valuation of $1 billion or more. Throughout the entirety of the surveying process, the identity of and data for these samples were gathered from several sources, including CB Insights, Capital IQ, CrunchBase, PitchBook, Preqin, and Wells Fargo, as well as their own research. 
  3. Sources: Stripe; “Stripe has raised a new round of funding to accelerate momentum in Europe and reinforce enterprise leadership.” Stripe data as of 3/14/21. Amazon: https://techcrunch.com/2017/06/28/a-look-back-at-amazons-1997-ipo/.

Large Private Equity funds generally hold a portfolio of companies, and successful fund managers purchase companies that have the potential to add value to the overall portfolio. In other words, they look to have the portfolio companies feed off each other, and, by extending their holding period, they are allowed adequate time to create value by implementing crossover initiatives. Investments in private debt and private credit focus more on providing a greater yield and overall return, than the public fixed income market while also maintaining and possibly increasing the value of their holdings. This is especially important at this point in time, as rising interest rates have historically caused a loss of value due to duration risk – something constantly discussed in investor meetings. Private real estate funds also focus on providing a yield, but with further potential advantages: growth opportunity due to property appreciation, tax advantages due to property depreciation, and the ability for real assets to hedge inflationary risks.

How Do Alternatives Deliver

                When most people speak of investing, they are most familiar with one market, stocks listed on U.S. stock exchanges, which are public, liquid, and provide timely information to anyone who is interested. People rarely think about another, much larger market, the private market, where information is not as transparent and investments are generally not as liquid. For those unfamiliar with the investing term “liquid” (or liquidity), surprisingly, we are not discussing a favorite drink. Liquidity is referred to as how easily an asset can be converted to cash. Assets like stocks and bonds that trade on the public market can be converted to cash in a day or two. Alternative Investments are generally not as liquid, meaning you cannot just sell them over the counter and see your money quickly. There can be lock-up periods, partnership votes, property sales, long-term contracts, and many other protocols to convert an investment back into cash. Because of this lower liquidity, investors in private markets can demand a greater return on their investment, called a liquidity premium. Keep in mind that just because an investment is illiquid does not mean it guarantees positive returns or any return level; however, companies are generally willing to pay more for extended use of funds.

Going back to the overall size of the private market, we often think the public stock market composes the vast majority of the market. However, the private company universe is magnitudes larger than the public market. According to the US Census, there are approximately 6 million companies with employees in the U.S., only about 5,700 of which are listed on the New York Stock Exchange and the NASDAQ combined.1

1. Source: U.S. Census Bureau – Statistics of U.S. Businesses; Droidge, Karolyi and Stulz (1988-2017). Represents the latest data available as of 2/5/21.

2. Source: www.wilshire.com. As of 2/5/21.

3. Source: Kaiser Family Foundation, 2019 data; www.kff.org. Data updated as of 2/5/21.

Information, or lack thereof, is another driver of return for private investments. The SEC, or Securities and Exchange Commission, requires publicly listed companies to provide potential investors with annual reports and other disclosures containing information regarding their finances, strategies, and operating procedures. These rules theoretically allow all investors to be on the same playing field when evaluating an investment. Private companies are not required to provide investors with the same level of information and disclosures and, therefore, are more difficult to value, which in turn leads to the need for more educated investment decisions.

Are Private Investments Risky

                Just like any other investment, or for that matter, any other decision we make in life, Alternative Investments pose certain risks. Interestingly enough, the same traits that make private investments valuable are also what make them risky. As discussed before, the lack of transparency in private markets, as opposed to public markets, leads to both risk and, hopefully, reward. Similarly, the liquidity premium you expect to be paid could also be detrimental if you were to have a need to redeem your investment in a timely manner. It is imperative to look at private investments over a long-term horizon and only invest funds that would not be needed in the near future. Some alternative investments also require investors to become partners in the fund, venture, property, etc., so it is essential for investors to understand the structure of the deal and confirm they are limited to loss of investment only and are not on the hook for further investment. Finally, alternatives can be highly concentrated, adding to a level of risk not generally found in ETFs, Mutual Funds, or market indexes.

In closing, Alternative Investments can be an impressive source of return, growth, and protection for many investors. Still, they should normally be considered a part of the overall portfolio, not the entire investment strategy. Anyone wanting to invest or learn more should read, research, and then speak to their tax, legal, and financial professionals about Alternative Investments before diving in head-first.

To discuss this article further contact Peter Ramsey at pramsey@capsouthparters.com or to learn more about CapSouth Wealth Management, visit our website at www.capsouthwm.com or https://capsouthwm.com/what-we-do/investment-management/. Call 800.929.1001 to schedule an appointment to speak with an advisor.

Investment advisory services are offered through CapSouth Partners, Inc, dba CapSouth Wealth Management, an independent registered Investment Advisory firm. Information provided by sources deemed to be reliable. CapSouth does not guarantee the accuracy or completeness of the information. CapSouth does not offer tax, accounting, or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences. This information has been prepared solely for informational purposes, is general in nature and is not intended as specific advice. Any performance data quoted represents past performance; past performance is no guarantee of future results.

Am I Going to be Okay?

Am I Going to be Okay?

Worry is defined as a state of anxiety and uncertainty over actual or potential problems. That’s the noun form of the word. I’d like to focus on the verb form, if I might, which is defined: to give way to anxiety or unease, to allow one’s mind to dwell on difficulty or troubles. Anybody resemble that remark, as they say? [Billy raises his hand].  This may or may not come as a surprise, but my worry typically has little to do with the stock market.  

I worry more about things I’m less familiar with. How, for example, can I ensure my family remains safe through a global pandemic? Not only for their physical well-being, but from the effects of isolation from friends and teammates to media-driven fear and hyperbole.  Wading through the psychological make up of teenagers can be challenging enough let alone during the last two years! Well, I’m still not sure how to address all of that, but my belief is that my family and my children are here, in this community, in the midst of all that’s going on, at the precise time they were appointed to be. And sometimes, when you don’t have all the answers, you seek wise counsel in conversation with a friend or mentor, or maybe in the pages of a book. (Or in my case, you do both…and often.)

And then you keep moving.

How are you faring through all of this? A recent study* by the American Psychiatric Association suggests that 40% of Americans were anxious about becoming seriously ill or dying from coronavirus and 62% were worried about the same for their loved ones. Bad thing about worrying is that it’s a slippery slope – things you may not otherwise worry about now have you on edge.  Ordinary and routine events may now become sources for worry. And left unchecked, worry can – for some – manifest physically and affect the way you feel even to the point where you live in a constant state of fear and dread.  All of this leaving us wrestling with this question:

Am I going to be okay?

As many of you can attest, numbers aren’t the only things CapSouth pays attention to. And quite frankly, they’re not even the most important.  Sure, there are certain numbers that are likely to be part of the conversation. Returns, Probability of Success, for some, 33-18, for others.  But out of context, they’re only numbers. What gives meaning to those numbers is the life you want to live and how you’re planning to get there. Or as you’ve heard us say, living your one best financial life. A lot of what’s going on in the world today I don’t even have a name for. At least not one suitable for this article. Quite a bit of what we see, read, and hear these days is certainly good for news stories. (Not that I always believe it’s newsworthy. That’s a topic for another day.) They do, however, generate viewership, readership and advertising.  And so, the machine churns. And in the process, the narrative causes uncertainty, concern, and for some, full-fledged worry.  And so that machine churns, also.  

As it relates to your financial plan, to your one best financial life, allow us to join the conversation if you feel yourself slipping toward worry. Is it okay to be concerned? Of course, and it’s prudent. Your retirement assets may likely be the single largest asset you’ll ever have.  Is it okay to be uncertain? Of course, and it’s unavoidable at times. The news cycles have and will forever generate short-term market movement.  We see this play out daily.  The market’s going to go up, sideways, or down.  Whether you watch it on TV or on your phone, or maybe choose to go for a walk with a loved one instead – it’s going to happen. All of which, quite likely, in the same day. That said, please allow us to help you filter through the noise and help keep it in context.  Not all of it matters, and you don’t have to go through it alone.

There are some pretty sharp individuals you have working on your behalf here at CapSouth. I’ve spent ten years of my life working with them. People I trust and depend on greatly. Not just because of how smart they may be or how hard they work for the benefit our clients, but because of the type of individuals they are. I may be preaching to the choir as some of you have been around CapSouth longer than I have. One of our values is to treat others the way we want to be treated. Maybe it’s a clarification of a news event? Maybe it’s a recap of your estate plan?  Or maybe it’s just having someone who’ll listen.

We’re here. How can we help?  Click here to Connect With Us

To discuss this article further or to learn more about CapSouth Wealth Management, visit our website at www.capsouthwm.com or call 800.929.1001 to schedule an appointment to speak with an advisor.

By:  Billy McCarthy, Wealth Manager

*New Poll: COVID-19 Impacting Mental Well-Being: Americans Feeling Anxious, Especially for Loved Ones; Older Adults are Less Anxious

American Psychiatric Association, May 25, 2020

https://www.psychiatry.org/newsroom/news-releases/new-poll-covid-19-impacting-mental-well-being-americans-feeling-anxious-especially-for-loved-ones-older-adults-are-less-anxious.

Investment advisory services are offered through CapSouth Partners, Inc, dba CapSouth Wealth Management, an independent registered Investment Advisory firm. Information provided by sources deemed to be reliable. CapSouth does not guarantee the accuracy or completeness of the information. CapSouth does not offer tax, accounting, or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences. This information has been prepared solely for informational purposes, is general in nature and is not intended as specific advice. This article contains external links to third party content (content hosted on sites unaffiliated with CapSouth Partners). CapSouth makes no representations whatsoever regarding any third party content/sites. Linking to these third party sites in no way implies an endorsement or affiliation of any kind between CapSouth and any third party, including legal authorization to use any trademark, trade name, logo, or copyrighted materials belonging to either entity.

The “If/Thens” of Financial Stewardship

Financial Stewardship is often described with words such as planning, management, attention and care. All good words. All right on point. The key, though, is how do you make it a topic worth spending your time on? Well, it’s all in how you package it. For example, I’ve really come to enjoy if/then statements. The perfect combination of hypothesis and conclusion. My family uses them on me all the time:

Son # 1: “If I get a full scholarship, then you have to buy me a new car.”

Son # 2: “If I make this shot, then I get to stay up later.”

Son # 3: “If you can’t guess what number I’m thinking of, then I get to keep your guitar.”

Son # 4: “If I eat twenty goldfish at one time, then you have to play basketball with me.”

Wife #1: “If you don’t put up these clothes, then I’m going to…” (You get the point.)

As you can see, conditional statements can cover a wide variety of subjects. That said, most of the above center around time and money – two things folks seem to always want more of.  And while I can’t provide you with more time, I can offer a few suggestions on the financial side. (See what I did there? Now you’re interested in financial stewardship.) So, here’s a quick list of financial if/then statements you may find valuable:

  1. If you don’t contribute to your 401K, then you might be missing out on the employer match.

Some employers will put a matching contribution into your 401(k) if you’ll just – contribute. That’s called free money, by the way. Technically, it’s called an employer match, and if you want as much of that free money as your employer is willing to give, then max the match.  For example, if they match 50% of your contribution up to 6%, then consider putting in 6%.  Disclaimer: Don’t stop paying your bills or putting food on the table in order to put money in your 401(k), but do consider taking advantage of this employee benefit if offered. The employer match is often a discretionary match, meaning, it’s up to the employer’s discretion to offer it or not. So, if you’re eligible for an employer match, look into it. You’ve heard the expression, “There’s no such thing as a free lunch?” Well, this is pretty close.

2. If you want to know where your heart is, then check your credit card or bank statements.

Warning: If you look, then you will surely find. Every dollar you make is going somewhere, right? Take ownership of that. You have the authority, if not the responsibility, to account for every dollar that comes in. Let’s be honest, not every purchase is accounted for or was part of your financial plan, now is it? It’s likely, as you have at least a passing interest in financial stewardship, that you have a good accounting of where your money is going. But life happens, and thanks to the marvel of auto-pay for example, you may have unwittingly fallen victim to subscriptions to music and video services, magazines, jelly of the month clubs, etc., that you weren’t even aware of…but that your kids were. (This may or may not have happened to me.)  And each and every month, they’re helping themselves to your dollars (the auto-pay…and your kids, too, possibly). And be aware, fraud is a big business. As in billions with a “b” in 2020. One report suggests that over $117M of that originated from social media scams alone. There are different rules with debit and credit cards as to how much of a fraudulent charge you may be responsible for, so check those statements for charges that may not be yours. Time is important here. Review often and report right away.

3. If you don’t model financial stewardship for your kids, then who will?

Please discuss financial stewardship with your kids. If you don’t model it for them, then culture will. The same culture that brings us such family friendly hits as Miley Cyrus, Howard Stern and The Bachelor. As part of our client experience, we engage in an Honest Conversations® exercise that highlights what clients value most out of life and serves as the foundation for their financial plan. More often than not, how financial stewardship was modeled for them when they were young is the impetus for how they model financial stewardship for their kids. It was either discussed as a family concern, or it was never discussed and deemed none of the kids’ business. I would encourage you to model financial stewardship for those you have influence with and bring them into the conversation (as age appropriate) thereby establishing a healthy appreciation for money and a head start on financial stewardship.

4. If you’re working and NOT saving for retirement, then what’s wrong with you?

I’ll spare you the grim statistics on the percentage of Americans who are nearing retirement and aren’t prepared for it. On second thought, let’s talk about it. In a 2019 GOBankingRates survey1 of 2000 respondents, 64% reported they will likely retire – broke. Here’s an even harder to believe statistic, 48% didn’t care. What? Here’s the deal. Your retirement is not your government’s responsibility, nor is it your employer’s.  It’s yours. So make a plan. Age is not an excuse, by the way. You’re never too young to be introduced to the value of planning and preparation. As a matter of fact, the younger the better!  Insurance is typically less expensive, your investment time horizon is likely longer, and your margin for course correction is typically much greater. Seek wise counsel. If you were only able to remember a single thing written in this article, then remember those three words:  Seek. Wise. Counsel.

5. If you think Social Security is going to take care of your living expenses during retirement, then you’re wrong.

Read most any recent article on Social Security and you’ll discover the uncomfortable truth. If changes aren’t on the horizon, then Social Security won’t be either. Reserves are projected to last until 2037, or so, unless significant changes are made. Still, Social Security is certainly worthy of your consideration, and we can assist with a strategy tailored to your plan. It’s a part of your retirement strategy, but it shouldn’t be your retirement strategy.

6. If you’re investing in the stock market and aren’t adhering to a financial plan, then you may be taking more (or less) risk than you need to.

We believe a well-designed financial plan is a vital component in reaching the financial goals you have for you and your family, and your investment strategy should support the goals within your plan. Your investment strategy is a tool – it’s not the plan itself. Once we determine how our clients want to live their one best financial life, we devise a plan, with a corresponding investment strategy to help them get there. And we prefer you not take any more risk than is necessary to accomplish your goals. So what happens if the amount of return that’s required to reach your goals is more than you’re comfortable with? That’s when priorities and tradeoffs are made. Rarely does financial stewardship or living one’s best financial life happen by accident. It requires action.

If you don’t know how much risk you should be taking to accomplish your goals and objectives, or maybe you’re not even sure where to start, then start with an Honest Conversation. We can have one.

7. And finally, if your son wants you to play basketball with him, then by all means – play.

They don’t stay 12 for very long, do they.   

If you would like to learn more about CapSouth Wealth Management please visit our website at www.CapSouthWM.com  if you would like to have a conversation to discuss this article further, I’d love to chat. 334.673.8600.  

by: Billy McCarthy, Wealth Advisor

164% of Americans Aren’t Prepared For Retirement | GOBankingRates

CapSouth Partners, Inc., dba CapSouth Wealth Management, is an independent registered Investment Advisory firm.  This material has been prepared for planning purposes only and is not intended as specific advice. CapSouth does not offer tax, accounting or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences.

This article contains external links to third party content (content hosted on sites unaffiliated with CapSouth). CapSouth makes no representations whatsoever regarding any third party content/sites that may be accessible directly or indirectly from this article. Linking to these third party sites in no way implies an endorsement or affiliation of any kind between CapSouth and any third party, including legal authorization to use any trademark, trade name, logo, or copyrighted materials belonging to either entity.

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