Alternative investments, specifically in private real estate, have become a more prominent part of high net worth investor portfolios in recent years. As the perception of potential investment cycles, uncertainty, and interest rate movements exist in the public markets, accredited investors have sought alternative investment strategies (such as private real estate) as vehicles to grow, produce cash flow on, and preserve their wealth.
Alternative investments in private real estate are not a “one-size fits all” answer to the investment goals of all high net worth investors. However, there are many situations where they can play a relevant role; here are 5 situations in which alternative investment strategies (such as private real estate) can be a viable consideration for high net worth investors:
When You Have a Medium to Long-Term Time Horizon
Alternative investments typically have medium to long-term time horizons. This is due to the nature of the investment; alternatives such as private equity and private real estate require a multi-year holding period before the investment can be exited, and a targeted overall return can be realized.
Related to this time horizon is the lockup period; the lockup period is the amount of time an investment cannot be liquidated. For MLG Capital’s funds, this lockup period is typically 5-8 years. This estimate is driven from more than 30 years of investment performance, fitting in with the typical holding period of assets in this asset class..
If your investment objectives require a shorter time horizon (and a greater flexibility to access your money), alternative investments may not be optimal. But if you can invest funds you won’t need in the near term, alternatives can provide you with an attractive vehicle to grow your wealth, and produce cash flow along the way!
When Your Portfolio is Concentrated in Just a Few Assets
“Don’t Put All Your Eggs in One Basket” is an oft-repeated maxim, but in many cases, investors fail to properly diversify their portfolio. While it is logical to assume it makes more sense to have a large portion of your net worth in an asset you control (such as a business you operate), this may not insulate your wealth from long-term risks.
Investing excess capital, liquidity, or the proceeds from the sale of a business into alternative investments (like private real estate) may provide you with a more diversified portfolio, mitigating long-term risks to your wealth.
When Your Portfolio is Heavily Exposed to the Public Markets
While it is prudent to properly diversify a portfolio invested in the public markets, diversification only within these two asset classes (equity and fixed-income) can have its own ramifications: while you’re limiting your risk in terms of individual stock or bond performance, a portfolio entirely invested in the public markets will still be exposed to general market risk and fluctuations.
In an age where black swan events can cause volatility spikes, it is prudent to diversify a portfolio outside of traditional public equity and fixed income investments. Alternative investments such as private real estate can provide a resource to target lower volatility, and at times, are not correlated to the public markets.
When You Want Exposure to Real Estate, But Lack the Time or Experience
Many high net worth investors are interested in private real estate investments. Perhaps a friend or relative of theirs had success in real estate investing, and decide they too should explore these opportunities. They’ll purchase a commercial real estate property, then hire a third-party property management firm for the day-to-day operations.
However, this is easier said than done. Successful commercial real estate investing has a steep learning curve; a strong mix of time, talent, and expertise are required must to properly execute this strategy.
If you are looking for real estate exposure for your portfolio, and have little actual experience in real estate investing, putting your capital to work in a private real estate fund (such as MLG Capital’s funds) may be the better option.
Below is an example of how investing in a private real estate fund (as opposed to an individual property/syndication) can be the better option when it comes to real estate investing:
When You’ve Experienced a Liquidity Event
If you are a high net worth investor who has experienced a liquidity event (sale/public offering of a company, sale of a piece of real estate), large windfall, you are probably looking for a strong vehicle to grow capital, create cash flow, and preserve this newly realized wealth.
The best time to consider an alternative investment (such as MLG’s private real estate funds) would be immediately after a liquidity event. In such a situation, you will have capital to put to work, and a plethora of options that offer many advantages over traditional equity and fixed-income investments. You’ll be able to take some risk off the table, and leverage the talents and expertise of a real estate investment firm to help you generate targeted capital returns.
Alternative investments may not be optimal in all situations, but for these 5 situations common with high net worth investors, alternatives such as private real estate are a strong option for wealth preservation and growth. Whether the situation is investment objective related, risk management related, or a situation where you looking to expand into new frontiers to grow your portfolio, alternative investment strategies such as private real estate investments can help you meet your financial objectives.