You hear financial experts speak all the time about what they think the best investment strategies are. It may even sometimes feel political, especially the way the pundits bat ideas back and forth on podcasts and cable finance news. Just when you think you’ve learned something new about investing, you end up back at square one because the stock markets swing the very next day.
As an investor with shares of stocks already, you expect volatility in your equity portfolio. But, somehow, preparing to make your next move to invest may seem like the first time. Everyone talks about investing in low cost, passively managed index funds and leaving it up to the market to decide. Is it wishful thinking for you to plan to do better than this? Probably not.
The central questions to consider as you are examining these issues for yourself are:
- Can I invest in higher risk but reputable funds that will outperform their benchmarks?
- Will wealth management strategies with higher fees exist still give me a better chance at the highest returns?
Before considering any other wealth management strategies, prepare for retirement first
Before you decide to start building a portfolio of wealth-generating assets, be certain that you have a retirement plan in place with automated contributions that are growing those accounts. Employer-sponsored plans with matching contributions are the best way to start. Check out your other employer benefits, including sponsored Roth-styled IRA and 401(k) accounts. They may have lower fees for employees than banks and are usually FDIC-insured like any account you set up at a bank yourself. If your company offers an employee stock purchase plan (ESPP), you are already ahead in returns on investments (ROIs) on your global equity portfolio. Once your retirement plan is in place, you can turn your attention to other investment possibilities.
Private markets as investment alternatives
“Alternative investments” broadly describes the unconventional investment vehicles which are used to raise capital. Wealth management strategies often consider private markets, which may produce higher-yielding returns and opportunities to raise capital. The two major classes of private markets include private equity and private credit. Private equity strategies include: private real estate, special situations, and leveraged buyouts (LBOs).
Private equity funds
Private real estate capital managers sometimes purchase existing properties to resolve deferred maintenance issues and redevelop them. It is a repositioning strategy where, once capital improvements get completed, the building gets an upgrade to a Class “A” commercial space. The investors are rewarded with increased net operating income (NOI) as a result of higher tenant lease rates in the newly refurbished space.
Special situations describe a range of unusual private equity investment opportunities that happen infrequently, but which research analysts use to uncover and generate capital. Event driven and opportunistic funds are sub-categories within the special situations private equity sub-class.
Leveraged buyouts occur in any number of industries, whether medical technology, retail, or competitor. You sometimes hear about companies “going private.” For example, Toys “R” Us was privatized as a result of a leveraged buyout. Leveraged buyouts generate wealth when fund managers identify operational inefficiencies and other structural weaknesses in a company, such as management.
How private markets work
The fund itself is a limited partnership (LP) and requires the prospective investor to complete submission docs (“sub” docs) before they can become a partner. The minimum investment threshold is usually $250,000 and the average high commitment is $1,000,000. Some deals are exclusive, and the number of partners allowed is pre-determined by the fund manager.
Every dollar received is a liability; therefore, the fund does not take on more capital than they believe they can invest and generate a desirable return. Generally, high net-worth individuals (HNWIs), Family Offices (FOs), and Institutional Trusts are the best candidates for private market placement opportunities. No additional investors are accepted once the fund closes.
The investment horizon for a private market fund is usually between four and seven years. However, distributions may continue past the period, depending on the strategy and success of the fund. Investors receive notification of each capital call when a payment towards the commitment amount is required.
The fund manages the use of the combined capital. Each partner contributes and receives the same percentage based on their commitment. Wealth management strategies often include private market investments because they are tax-friendly and can sometimes generate an internal rate of return (IRR) above 10%.
The downside of private markets is the high cost of entry and rigorous qualification standards. You also need to have a minimum net worth, which includes access to investable capital. Then there are the capital call requirements, which can come with some randomness and must be wired in a two- to three-week period.
Less common mutual funds
Some mutual funds are rarely discussed over coffee but are noteworthy investments. They are not usually designated as retail or institutional class like you see in other commonly traded mutual funds. The minimum investment per unit share can vary and all are tied to a maturity date. Some issues may be $100,000 or more and issuers can reserve the right to call the bond early.
Municipalities issue floating- and fixed-rate municipal bonds that pay higher yields than treasury bonds but with still relatively low-risk. Cities create “Muni” bonds to raise capital for a variety of infrastructural purposes, including building new public schools. Muni bonds are usually sound debt instruments if the municipality has never defaulted on a payment or experienced a bankruptcy.
High-Yield Corporate Bonds
High-yield corporate bonds are riskier than “munis” because they aren’t backed by taxpayer dollars. If a company goes bankrupt, then the principal bondholders get paid first—the government if they owe taxes, followed by investment bankers. Risk is lower when they are frequently traded. Steer away from thinly traded high-yield corporate debt. Corporate bonds are another avenue at making potentially higher earnings in the bond market outside of traditional core fixed income products.
Choose a wealth manager who knows capital markets
You need an experienced wealth manager who can explore alternative investment opportunities with you. A great wealth manager in the San Francisco Bay Area will show you a holistic view of your finances as they plan with you for your future. SD Mayer in the Financial District has a team of dedicated financial advisors who do exactly this. A full-range wealth advisory and accounting firm with decades of experience working with newer investors like yourself, SD Mayer professionals are committed to due diligence and carefully research the top performers in each asset class so that you are making the best investment possible.
SD Mayer advisors have decades of experience helping clients understand alternative investment opportunities and wealth management strategies. They look forward to the opportunity to have that conversation with you about what investments give you a better shot at generating the highest payoff. Contact us today to set up an initial consultation.
SECURITIES AND ADVISORY DISCLOSURE:
Securities offered through Valmark Securities, Inc. Member FINRA, SIPC. Fee based planning offered through SDM Advisors, LLC. Third party money management offered through Valmark Advisers, Inc a SEC registered investment advisor. 130 Springside Drive, Suite 300, Akron, Ohio 44333-2431. 1-800-765-5201. SDM Advisors, LLC is a separate entity from Valmark Securities Inc. and Valmark Advisers, Inc.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. The services of an appropriate professional should be sought regarding your individual situation.