When you hear “Alternative Investment,” it likely means anything that is not “Wall Street”. It is an investment that is an alternative to Stocks, Bonds, ETFs, and Mutual

Funds. Alternative investments can also refer to real estate as recently the term has become synonymous with syndicated real estate deals.

According to a recent study by UBS/Campden Wealth, the top global Family Offices have 46% of their assets in alternative investments. If that percentage reaches over 50%, maybe we will start to call stocks and bonds “alternative!”

It makes sense to invest like the wealthiest among us. Not only are the investments non-correlated to the stock market, there may also be substantial tax benefits as well.

Although direct investment into real estate is a high percentage of alternative investments, the list of possible alternatives includes:

  • Real Estate
  • Private Mortgages
  • Tax Liens
  • Private Company Equity
  • Structured Settlements
  • Farmland
  • Equipment Leasing
  • Oil and Gas LPs
  • Artwork and Collectibles
  • Timberland
  • Private Equity
  • Venture Capital
  • Hedge Funds
  • Fund of Funds
  • Commodities
  • Trade Finance
  • Marine Finance
  • Litigation Funding
  • Film
  • Aviation
  • Franchise
  • Distressed Debt
  • Intellectual Property
  • Mezzanine Debt
  • Liquid Alternatives
  • Structured Notes

If you are considering investing in any type of alternative investment, direct investments into real estate, or private equity, here are 4 questions to consider:

In what scenarios can I lose money?  How probable are those scenarios?
Always try to understand what would happen if the investment defaulted, and what measures are in place to protect your principal balance. If the investment is a real estate opportunity, is the LTV (loan-to-value ratio) sufficient to cover the loan? What is the underlying collateral, and how is it structured? You need to know the different scenarios that could leave you behind, the likelihood of being left behind, and make sure you are comfortable taking and facing those risks.

Who else is behind this opportunity?
You should have a solid understanding of the sponsor, the borrower or the originator, and their respective track records. Who is calling the shots? Look at the obligor’s credit rating, historical track record, and management history. Ask questions! If it is a hard money loan, does the borrower have a proven history of repaying investors in full and on schedule?

Besides looking at the sponsor, you should know who is investing alongside them, such as an institutional or accredited investor. This can be beneficial because it shows that third-party investors have shown their confidence in the investment by performing their own due diligence and participating alongside your investment. It also gives peace of mind knowing that participants and the originator have a vested interest in the opportunity and will work to ensure a successful outcome. Getting a good scope of who else is in the opportunity besides you – from the sponsor, originator, and borrower to other investors – will give you a further understanding of the opportunity’s quality.

How will I get repaid?
Understanding the repayment schedule and structure before investing in an opportunity will help prevent any surprises. What is the expected timeline? Is it likely to be realized? What unexpected events could delay the project? Are you comfortable with event-based payouts, which can be less predictable, or are you looking for a scheduled monthly payment? Make sure that the payment structure fits your cash flow and investment needs.

How is the target interest/return determined?
Once you’ve determined the structure of the offering and the potential risks, take a look at the associated yield or return on invested capital. Does it make sense given the risk you’re taking on? A typical investor’s mindset is that a higher return means higher risk, but that may not always be the case with asset-based lending. Dig deep on the risk/return profile of the opportunity and make sure that it makes sense for your needs and you are comfortable after calculating the return on investment.

While these questions may not cover all the investor due diligence necessary before investing in an opportunity, they can provide a guideline to help you get started on forming your own process. Armed with these questions, download an investment memorandum and do a practice run of reading through it to determine your level of comfort with the opportunity. Over time, you can build out your own personal due diligence process of what aspects are most important to you and learn to understand any asset-based investment. To learn more, call (772) 257-7888.