Over 30 Years of Sourcing, Evaluating, And Monitoring Private Alternative Investments For Your Portfolio
Higher inflation rates. Economic uncertainty. Global instability. These are unprecedented times for investors. As lower bond yields and high volatility challenge traditional portfolios, investors are looking to diversify. They seek innovative solutions that offer the potential for higher growth, higher yields, stronger absolute returns and less volatility. They understand that this comes with the tradeoff of having less liquidity than traditional stocks and bonds.
Enter private alternatives.
Private alternatives, or ‘alts,’ have been a key part of Homrich Berg’s investment philosophy for over 30 years, and we believe they are as relevant today as they have ever been. We started investing in private alternatives outside of traditional stocks and bonds back in the early 1990s and have grown to be one of the leading independent fiduciary RIAs focused on these investments. Since then, HB has continued to grow in this space with nearly $1.5 billion assets under management (as of 3/31/2022) invested for clients in private alternatives.
Our Chief Investment Officer, Stephanie Lang, CFA is the leader of the Atlanta Institutional Investor group, a collection of major institutional investors focused on the private alternative space. She manages a dedicated team of analysts who are responsible for sourcing, evaluating, and monitoring private investments. This includes Dan Ziznewski, CFA who oversees Homrich Berg’s sourcing, due diligence, and manager selection for private alternative asset classes and is a frequent commentator on the topic.
You May Be Asking, What Are Private Alts?
Simply put, we define alternatives broadly as opportunities that are not publicly traded on an exchange. While public managers own the equity (stocks) and debt (bonds) of public companies, an entire universe of managers within alternatives do this with private companies and assets.
As such, private alternative investments provide investors opportunities that might not be readily accessible via the public markets. In addition, since private alternatives can be less correlated to traditional asset classes, they can have greater diversification potential in the context of a total portfolio. They are typically not as liquid as public investments, so investors have to recognize that tradeoff.
Private alternative investments can include:
- Real Estate Investments
- Private Equity Funds
- Private Energy Funds
- Private Debt Funds
- Hedge Funds
- Venture Capital Funds
- Distressed Opportunity Funds
Why Private Alts Are Expanding
A number of trends are contributing to the growth of private alts investment opportunities.
- Privately held versus publicly traded.
Private companies are now a larger part of the economy, creating more opportunity for private equity investors. In 1996, more than 7,400 companies were listed on U.S. stock exchanges. Today, that figure is less than half that, as many more companies choose to remain private. Just as the number of publicly traded companies has fallen, the number of private firms has risen dramatically. With public markets shrinking and private markets growing, more wealth creation is taking place outside of public markets. Alternative investments provide access to these firms and expand investors’ options.
- Performance benchmarking and return expectations.
Throughout 2021, alternatives demonstrated their ability to weather economic volatility and manage risk while producing returns that met or exceed investor expectations. According to the 2021 EY Global Alternative Fund Survey, more than half (51%) of investors surveyed report increasing value delivered by alternative fund managers in the last two to three years, with investors overwhelmingly indicating that alternatives met or exceeded their return expectations.¹ Across alternatives, an average of 86% of investors said performance had met or exceeded expectations in 2021.²
- Growing appeal.
With that, the appeal of alternatives continues to grow. Of those surveyed by EY, 81% of ultra-high-net-worth investors (net worth of $30 million), 55% of high-net-worth investors and 14% of the mass affluent now hold alternative investments. Alternative assets fund managers, who currently hold more than $13 trillion in assets under management, are expected to hold $23.21 trillion by the end of 2026, according to Preqin’s 2022 Global Alternatives Reports.³
The magnitude of rising individual investor allocations toward alternatives supports our desire at Homrich Berg to expand our clients’ access to private market investments.
Why Invest in Private Alts
While private investments can be riskier on a stand-alone basis, investors can be rewarded for this risk with higher returns to capture an “illiquidity premium.”
Ziznewski believes alternatives have the potential to reduce volatility within a portfolio because the fundamentals of many private assets, such as private companies or real estate properties, “might not be highly impacted by the day-to-day changes in public markets.”
Because of how private funds are generally structured, he explains, investors can take a longer-term approach to maximizing asset value, “particularly with private equity and private real estate,” says Ziznewski. “Private market investments tend to be active, buy-and-hold strategies with a hands-on approach, whereas public markets can be highly influenced by shorter-term events. For example, a public company that fails to hit its quarterly projections may see its stock drop.”
What To Consider Before Investing
Considerations of Investing in Private Alts
While liquidity is an important factor, so is manager selection. “In public markets, we believe the dispersion of returns among managers with the same intended strategy or benchmark won’t be significant,” says Ziznewski. “However, in private markets, your returns can vary considerably, because the dispersion might be substantial between top-quartile and bottom-quartile managers.” Investments should only be made with institutional managers who have appropriate guardrails in place via their legal documentation. Also, firms that offer alternatives to their clients should have dedicated resources to sourcing and performing due diligence on alternatives managers, as “private alts are so nuanced and different from public market offerings,” he adds.
Sourcing and Due Diligence
Firms must also know how to source opportunities. “Several thousand private funds are in the market at any given time, so the top of the funnel is very wide,” says Ziznewski. “Additionally, it’s quite challenging to whittle down the vast universe of managers to whoever you think will perform best within an asset class going forward.” Because it’s so time-consuming and resource intensive, Homrich Berg dedicates significant resources to researching and analyzing this area of the market precisely.
Scale also matters. Some private alts managers might require minimum investments of $5 to $10 million. Because Homrich Berg has accumulated years of relevant experience and manages over $11 billion in assets, it can access multiple avenues to reach higher minimums and become more meaningful to managers. “We create funds-of-funds for clients, which allows us to make one larger commitment to managers by aggregating capital from many clients. We also provide the opportunity for larger clients to simply invest direct in their own personal mix of individual funds that we have approved.”