Skip to main content

Investments

Alternative Vs. Traditional

Traditional Investments

Traditional investments are generally regarded as some form of publicly traded equities and can be a combination of instruments from stocks and bonds to mutual funds and ETFs. They can be creatively structured with varying degrees of risk and volatility, and they can be diversified among domestic,
international, growth, value, etc. Fundamentally, they are all relatively liquid and closely correlated to the movement of the stock market.


Alternative Investments

Alternative investments comprise the rest of the investment universe. They can run the gamut from tangible assets like collectibles, antiques, commodities and art to financial assets like private equity, venture capital, distressed bonds, hedge funds, and private equity real estate. Generally alternative investments share a few characteristics that distinguish them from traditional investments:

  • Low historical correlation to the stock market. They aren’t marked to market every day like traditional investments.
  • Higher degree of illiquidity going in and going out. Alternative investments generally have higher barriers to entry and require a robust due diligence period before being offered to investors. Often, there is a minimum investment holding period required, and liquidation of the investment also requires more procurement and processing time given that these transactions are private and not subject to ‘the push of a button.

.

Benefits of Alternative Investments

  • Over the last 30 years, institutional ownership of alternative investments has skyrocketed, and they now enjoy substantial and growing allocations of institutional portfolios.
  • “True Diversification”. There are only so many ways stocks and bonds can be combined. Alternatives, however, offer true diversification into different asset classes, with a greater potential for stability and non-correlated higher returns.
  • Accredited Investor Requirement. Most of the real estate opportunities we offer require accredited investor status because of the illiquid nature of these investments.
  • Illiquidity Premium. Accredited Investor Requirement. Most of the real estate opportunities we offer require accredited investor status because of the illiquid nature of these investments. When investing in alternative assets, it’s important to understand the Illiquidity Premium. The illiquidity premium is the compensation investors demand in exchange for losing access to their capital. Basically, the longer an investor must wait to recover their principal, the higher return they can demand. This relationship between time and return is central to investing in private real estate. Why? Because commercial real estate projects take time to develop and sell, making them harder to trade, like stock market securities.
    • Net Present Value. We look at the present value of future cash flows to determine the favorability of an investment.
    • J-Curve Analysis. We look at the timeline of cash outflows to cash inflows to help determine whether the projected returns on a project merit the illiquid nature of the investment.
    • Age of Client. We consider what stage of investment life the client is in. Will they need more cash flow for retirement and more liquidity for unanticipated contingencies. Is the illiquidity premium outweighed by more practical concerns?
    • Risk/return Categories. There are varying degrees of risk that we consider in the alternative space based on degree of leverage, the duration of the project, and the aggressiveness of the strategy.
      Core
      Core Plus
      Opportunistic

Many of our DST clients have used alternative products to further diversify out of publicly traded assets and to build in more income and growth to their portfolios.

Alternative Investment Opportunities

We offer the following categories of private real estate investment to accredited investors. We work with a carefully selected group of real estate fund sponsors with strong track records and demonstrated commitment to the industry.

The categories are:

  • Growth and Income Funds

    [‘Get paid while you wait’]. This is a real estate investment fund with a dual strategy of both capital appreciation and current income. These are geared to the investor with a moderate risk profile. These funds tend to lag pure growth funds, because part of the investment must have the stability to offer a current return. They are designed to favor stability and still deliver total returns that outpace inflation.

  • Special Situation Funds

    These funds are higher risk, higher return funds that invest capital into distressed, opportunistic, or complex re-entitlement, horizontal development, vertical development and asset repositioning transactions.

    The returns are largely back ended because all the capital is deployed towards maximizing growth in the form of capital gains. We recommend laddering these transactions so that after a few investments, investors can expect a semi regular liquidating distribution except that it’s treated more favorably as capital gains.

  • Real Estate Investment Trusts

    A real estate investment trust, or REIT, is a corporation that owns and/or manages income-producing commercial real estate. When individuals buy a real estate investment trust (REIT) share, they are purchasing a share of the company that owns and manages the rental property. Some REITS acquire or originate mortgage debt on real estate and act as a securitized lender. Others focus on a specific product type like residential, hospitality, commercial, industrial, net lease, etc. Still others focus on geographical locations like the Northeast or Southwest or Sunbelt, etc.

    Most people think of publicly traded REITS when they think of REITS. There are three types of REIT structures: (i) publicly traded, (ii) publicly listed non-traded and (iii) private REITS. We specialize in the latter two.

    Advantages and Disadvantages of Private REITS.

    • Higher Dividend yields than Public REITS.
    • No daily market fluctuations. Usually, quarterly mark to market.
    • Lower maintenance and organizational costs than public REITS.
    • Aggregation Premium. As the private REIT grows in size, it may sell to a larger public REIT for a value based on an aggregation premium resulting in a higher risk adjusted return for its investors.
    • Lack of Liquidity.
    • Higher initial cost.
  • Preferred Equity Funds

    Preferred equity is often referred to as a hybrid security. While it shares many of the characteristics of a debt instrument paying a fixed annual return, they tend to pay higher returns than debt for the same risk and may also enjoy an ‘equity kicker’ that participates in some of the appreciation on the project. They also enjoy priority in current payments over common stock dividends as well as priority in liquidation over traditional equity. Real estate sponsors are willing to pay higher returns on preferred equity because it increases the equity line on the balance sheet and makes a project more attractive to senior lenders.

  • Interval Funds

    Interval Funds. Interval funds are non-exchange-traded, closed-end funds that may appeal to individuals looking for opportunities to diversify their portfolios. Most interval funds do not trade on an exchange and are therefore not as directly influenced by market volatility. The key distinction from a REIT is that interval funds are required to offer to repurchase shares from shareholders during scheduled periods, or intervals. Repurchase offers typically take place on a quarterly basis at a price equal to the fund’s net asset value (NAV).