When thinking about the alternative investments landscape, and reasons why investors consider alternatives such as private equity, private debt, or private real estate, there are several potential objectives in scope, including: diversification, growth of capital, yield, access to a differentiated opportunity set, and interest in the asset class.
Public equities and fixed income markets have experienced significant volatility: heightened levels of inflation which is the highest in decades, higher interest rates and an increased likelihood of recession.
Private alternative investments may act in complement to public market assets like stocks and bonds. For example, thoughtfully positioning alternative income strategies along publicly traded fixed income instruments can help create a targeted yield or diversification profile. Private equity and real estate investments too may offer access to unique opportunities and assets.
In terms of private alternatives and allocation strategy, one way to approach investing is through a “program” lens, rather than as a discrete single investment decision. A programmatic approach is a framework for investing in alternatives, and it can support diversification across asset classes, strategies, and timeframes. A program can also be useful in setting up an alternative investment “budgeting” process, or deploying capital along a time horizon, working up to desired ranges. For example, if an investor seeks to deploy $1 million into alternatives as part of a long-term strategy, this could be accomplished by allocating $250,000 over four years rather than in one condensed timeframe. A customized program can provide a practical, plan-in-advance approach.
Taking the budgeting concept a step further, in addition to spreading out the time over which new commitments are made, certain private funds will draw down, or take in the previously committed investments, which will further elongate the total deployment window. Some investment structures are designed to raise capital, invest, manage, and distribute, and some may be invested and held for a targeted duration, or in perpetuity.
That being said, across market cycles, there will be periods of strength and periods of weakness; and along the way of using a programmatic investing approach, there may be tactical opportunities that come up. For example, as capital becomes scarce and conditions are tougher, opportunities for long-term allocators can actually improve.
There are different types of strategies within each category as well. For instance, certain managers specialize in secondaries market investing, which involves purchasing existing assets or interests—this one of several areas that we are considering in the quarters ahead.
Alternatives carry special risks and have limited liquidity or no liquidity; therefore it is important to discuss these and other factors with your William Blair wealth advisor, as they are equipped to help you navigate the world of alternatives.