Guides 15 July 2020

Alternative Investments – Navigating the Complex World of Possibilities

 

Fundnel provides a breakdown of some key alternative investment classes and the opportunities offered by Fundnel.

When it comes to choosing a product or asset class to invest in, the decision should revolve around one’s investment goals. The pursuit to fulfil those goals has led to a proliferation of investment options outside the common realm of asset classes. Here, we take a look at what you need to know about some of these key alternative investments, and how you can access them.

What are alternative investments?

In a nutshell, alternative investments are financial assets that sit outside the conventional investment categories such as equities, bonds and cash.

Some key characteristics to take note of as we go into the different types of alternative investments are these assets are usually:

  • Riskier and more illiquid than conventional asset classes
  • Used as a counterweight to conventional assets
  • A relatively higher barrier to entry, with most options available only for accredited investors

Here’s a breakdown of some key alternative investment classes.

Private Market Investments

Given the way in which the startup landscape has grown globally over the past couple of decades, it’s no surprise that private market investments have had a much bigger spotlight shone on them in recent times.

This is the most common way in which startups and high-growth private companies raise capital, and this is done by receiving investments from accredited investors and venture capital funds, most of the time in exchange for shares in their company. Investments can also be made via other types of private investment structures, such as convertible notes, SAFE notes, KISSes, etc. (Check out our Private Investments Guide here for a detailed breakdown.)

However, getting access to these deals hasn’t always been as simple. Apart from being an accredited investor, you would also need to be aware of the following drawbacks.

Risks:

  • Low liquidity
  • High risk of failure
  • Higher entry barrier

Benefits:

  • Portfolio diversification
  • Ability to engage directly with the fundraising company and its founders before committing to an investment
  • Gives accredited investors access to investment opportunities in private companies
  • Allows investors the potential of a more favourable  return on investments, though at much higher risk

Platforms such as Fundnel serve precisely this purpose, providing investors access to unique opportunities in high-growth startups, venture capital funds as well as other thematic private funds. This enables individuals to co-invest alongside institutional investors, which was something much harder to do previously. You can read more about private equity investments in Fundnel’s Invest section.

Secondaries

In Fundnel’s contribution to a report published by DealStreetAsia, we shared that the markets are witnessing a trend of companies staying private for longer, partly due to rosy investor sentiment towards the private market, and potentially strong headwinds companies may face when they go public. For many high-growth companies, most of its value capture thus happens in private rounds, with only a select few of the top venture capital and private equity firms participating in their funding rounds, leaving many other accredited investors shut out of these opportunities. However, via secondaries, investors who were previously unable to access the growth potential of these companies are now able to do so.

In the private capital markets, secondary opportunities arise when existing (primary) investors or employees of a private company seek to monetise their shares for liquidity prior to an exit event, such as an IPO, merger or acquisition. In essence, you are buying into the same company as a private investor would be, but at an indirect and later stage.

Platforms such as Fundnel exist to simplify the sales and trading process of secondaries, and reduce trade execution risk through a comprehensive due diligence process undertaken on behalf of buyers and sellers.

Risks:

  • Higher entry barrier
  • Possible information asymmetry on the counterparty and company

Benefits:

  • For buyers — Potential to purchase private company shares at a discount and diversify their portfolio
  • For sellers — Ability to monetise private shares and realise their paper gains ahead of an exit event

You can read a more in-depth analysis of secondaries and the secondary private capital market here.

Equity Crowdfunding

Equity Crowdfunding (ECF) is a type of alternative investment that enables early-stage startups and small and medium enterprises to raise capital by receiving investments from a larger pool of investors. It is important to note that depending on the platform and jurisdiction in which it operates, regulations surrounding equity crowdfunding may differ. In some jurisdictions such as Malaysia, ECF is an accessible option to retail investors, enabling them to support the growth of private companies.

If you are a Malaysian tax resident and are interested in ECF investment opportunities, learn more about how to sign up and view our available live ECF deals here.

Also known as: crowd-investing, investment crowdfunding, crowdsourced funding

Risks:

  • Low liquidity
  • High risk of failure
  • Higher entry barrier

Benefits:

  • Portfolio diversification
  • Potentially lucrative returns
  • Gives retail investors access to investment opportunities in private companies in certain jurisdictions
  • Allows investors to back companies they believe in

Peer-to-Peer (P2P) Lending

Peer-to-Peer (P2P) lending allows organisations to obtain loans directly from lenders, and allows the lender to earn interest on their investment when it is repaid. This is an alternative option for investors who are looking at higher-yield returns or a shorter investment horizon.

However, it’s important to note that the lender does bear the risk of default, just like financial institutions do.

Also known as: social lending, crowd lending, debt-crowdfunding, crowd financing

Risks:

  • Credit risk of borrower
  • Uninsured in case of default

Benefits:

  • Low barrier to entry, with some platforms in Singapore offering minimum investments of SGD100 onwards
  • Higher interest rates compared to traditional savings accounts, term deposits and other investments in certain jurisdictions
  • Potential for monthly payments

Luxury Collectibles

Ask the typical man on the street what their idea of an alternative investment is, and chances are you may hear them mention one of these – watches, wine, whisky, or art. These are some of the oldest forms of alternative investments, though luxury handbags in recent times have become highly sought-after investible goods as well. In fact, Knight Frank’s 2019 Luxury Investment Index cited that handbags yielded a 13% gain in performance against the previous year, due in no small part to the rising affluence of a younger generation tuned in to fashion and lifestyle trends.

Ultimately, owners of an Hermès, Patek Philippe, or that rare Botero are typically fuelled by their passion or deep interest in the specific item and associated industry. Unlike the previously mentioned alternative investment options, the risks associated with owning luxury goods as collectors’ items are slightly more complex.

Risks:

  • High maintenance fees to preserve the goods’ quality
  • Illiquid
  • Lack of dividends
  • Counterfeits and risk of asset destruction
  • Complex tax rules

Benefits:

  • Following your passion
  • Portfolio diversification

So what sort of considerations do you need to take into account when choosing which alternative investment is best for you? Here’s a simple summary:

Equity Crowdfunding Private Market Investments Secondaries P2P Lending Collectibles
Returns for investors Depends on deal terms and structure (e.g. equity, convertible notes, SAFE notes, etc.) Upon sale of shares to a buyer Repayment of capital with interest Upon liquidation
Investment Horizon Only upon an exit event OR sale of shares via the secondary market (if applicable) Upon an exit event OR re-sale of shares (if applicable) Tenure determined by P2P platform’s arrangement with company Until sale of collectible
Payout Period Once-off upon sale of shares during exit
OR sale of shares as secondaries (if applicable)
For Funds, upon end of fund life
Upon exit event e.g. IPO, merger, acquisition OR re-sale of shares (if applicable) Upon end of repayment period - Dependent on payment terms Once-off upon sale of collectible
Benefits Potentially higher returns. For Equity Crowdfunding, investors are able to back companies they believe in. For private investments, investors have the ability to gain larger return on investments, though at much higher risk Potential discounted purchase. Option for liquidity prior to a potentially prolonged period until an exit event (as companies stay private longer)Low barriers of entry. Better interest rates as compared to conventional bank interest rates. Potential for monthly payments Following your passion
Risks Low liquidity. High risk of failure Only available to accredited investors. Low liquidity. Higher minimums for investment. High risk of failure Higher minimum investment amounts. Limited supply of secondaries available. Limited demand for shares of smaller/less-known companies Credit risk of borrower. Uninsured in case of default High maintenance fees. Illiquid with no dividends. Risk of acquiring counterfeit goods

To find out more about how you can set foot into the diverse world of alternative investments with private investments and ECF in Malaysia, Fundnel is here to help.