Just like traditional investments, alternative investments vary greatly in their investment strategies, risk/reward characteristics, as well as their objectives in terms of growth, income, principal protection, and tax advantages, or a combination of these. The chart below represents a larger subset of alternative assets that today’s investors have access to.

Who can invest in Alternative Investments?

Most alternative investments require an accredited or qualified investor status.

Who is an Accredited Investor?

An accredited investor is a person or entity with exclusive access to complex, loosely regulated and often opaque investments like hedge funds, leveraged buyouts and startups. To qualify as an accredited investor, according to Rule 501 of the Securities Act, a person must meet one of the below tests:

1. Have an annual income of at least $200,000 (or $300,000 for joint income with a spouse) for the last two years with the expectation of earning the same or higher income in the current year

2. Have a net worth exceeding $1 million, either individually or jointly with their spouse, excluding the value of primary residence

3. Be a “knowledgeable employee” of the fund, with respect to investments in a private fund, or hold certain professional certifications, designations, or accreditations

Who is a Qualified Investor?

A qualified investor is a category of investors that are exempt from the provision of the Investment Advisers Act of 1940 that prohibits private investment funds from charging performance-based fees.

A qualified investor can be one of the following:

• A natural person who, or a company that, immediately after entering into the contract has at least $1 million under the management of the investment

• A natural person who, or a company that, the investment adviser entering into the contract (and any person acting on his behalf) reasonably believes, immediately prior to entering into the contract, either:

  1. Has a net worth (together, in the case of a natural person, with assets held jointly with a spouse) of more than $2 million, or

  2. Is a qualified purchaser as defined in section 2(a)(51)(A) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(51)(A)) at the time the contract is entered into

• A natural person who immediately prior to entering into the contract is:

  1. An executive officer, director, trustee, general partner, or person serving in a similar capacity, of the investment adviser, or

  2. An employee of the investment adviser (other than an employee performing solely clerical, secretarial or administrative functions with regard to the investment adviser) who, in connection with his or her regular functions or duties, participates in the investment activities of such investment adviser, provided that such employee has been performing such functions and duties for or on behalf of the investment adviser, or substantially similar functions or duties for or on behalf of another company for at least 12 months

Glossary of Terms

Listed below are the terms that are often used when discussing alternative investments:

• General Partner (GP) – An investor in a partnership business that is responsible for its day-to-day management; the fund manager is typically classified as the GP in the fund. GPs are responsible for investment decisions and management of the fund.

• Limited Partner (LP) – An investor who contributes capital to a partnership but has no management authority or liability beyond their investment; investors in a fund are typically classified as LPs in the fund. LPs own units of the fund and usually represent most of the capital but are not usually involved in decisions or management of the fund.

• Financial Sponsor – The team of individuals that will identify, execute and manage investments in privately held operating businesses. This is generally comprised of a General Partner and a Management Company.

• Management Fee – The fee earned by the GP for managing a fund (typically a % of NAV or commitments), paid regardless of how the fund performs.

• Performance Fee – An incentive fee is earned by the GP for strong performance and is typically only paid if the fund exceeds a minimum return threshold (aka hurdle rate, high-water mark, preferred return).

• Distribution Waterfall – A way to allocate investment returns or capital gains among participants of a group or pooled investment where the general partners usually receive a larger share of the total profits relative to their initial investment once the allocation process is complete.

• Return of Capital (ROC) – 100% of distributions go to the investors until they recover all of their initial capital contributions.

• Catch-up Tranche – 100% of the distributions go to the sponsor of the fund until it receives a certain percentage of profits.

• Carried Interest – A bonus entitlement accruing to an investment fund’s management company. Carried interest becomes payable once the investors have achieved repayment of their original investment in the fund, plus a defined hurdle rate, if applicable. (Varies according to each unique Limited Partnership Agreement)

• Internal Rate of Return (IRR) – The discount rate at which the present value of future cash flows of an investment equals to the cost of the investment.

• Lock-up Period – The minimum period of time that an investment fund would require investors to keep their positions.

• Exit (aka liquidity event) – The means by which a private equity firm realizes a return on its investment. Private equity investors generally receive their principal returns via a capital gain on the sale or flotation of investments.

• Capitalization Table (Cap Table) – An overview of the ownership of a company across multiple funding rounds, usually in the context of a venture-backed firm.

• LTV (loan to value) – The loan amount a fund will lend to a company as a percentage of the value of the company.

• Collateralized Loan Obligation (CLO) – A security backed by a pool of debt, which includes several levels of credit ratings and repayment structures.

• Interval Fund – A type of closed-end fund with shares that do not trade on the secondary market that periodically offers to repurchase its shares from shareholders. That is, the fund periodically offers to buy back a stated portion of its shares from shareholders. Shareholders are not required to accept these offers and sell their shares back to the fund.

A typical structure of an alternative private equity, real estate, or a hedge fund

What Current Alternative Investment Opportunities Exist?

As the world of investing is always in motion, certain opportunities catch our attention. We will periodically share some of the current ideas that we have come across, vetted, and would consider as potential small additions to client portfolios. Please note that these are not personalized recommendations. Alternative investments vary greatly on objectives, expected returns, risks, liquidity, and fees. Please see the full disclosure below. Please contact us to discuss any of these or other alternative opportunities and their potential place in your portfolio.