Alternative Investing: What You Need to Know
Key Points – Alternative Investing: What You Need to Know
- Growing Trends of Investors Considering Alternatives
- What Is Alternative Investing and Why Is It So Misunderstood?
- The Shift from Public to Private
- Factoring in the Public vs. Private Debate While Constructing Your Portfolio
- 8-Minute Read | 35-Minute Watch
Growing Trends of Investors Considering Alternatives
According to Goldman Sachs Alternatives Opening the Door to Alternatives study, which surveyed 1,000 high-net-worth individuals from the United States, 39% of investors with between $1 million and $5 million in investable assets use alternative investments to help diversify their portfolios.1 That percentage increased significantly for wealthier investors.
So, does that indicate that investment opportunities in private markets are primarily for the ultra-wealthy? Not necessarily. Dean Barber welcomed Tony Davidow, who is a senior alternative investment strategist at the Franklin Templeton Institute, as a special guest on America’s Wealth Management Show to help explain what alternative investing is, reasons to consider alternative investment strategies, and much more.
“To me, it’s an incredibly exciting time because we now have access to opportunities in private equity, private credit, private real estate and infrastructure that candidly weren’t available to individual investors up until fairly recently. What I’ve learned is that these are great tools, but they need to be used appropriately.” – Tony Davidow
What Is Alternative Investing?
Tony has his own podcast about alternative investments and recently authored the book, Private Markets: Building Better Portfolios with Private Equity, Private Credit, and Private Real Estate.2, 3 One thing that he and Dean have both noticed is that many people have had misconceptions about the private markets. So, let’s review what private equity, private credit, and private real estate are to try to help people understand alternative investment strategies.
Private Equity
Many investors trade public company shares — such as NVIDIA, Apple, Microsoft, Alphabet (Google), and Amazon — in open markets. It’s important to remember that many of the most popular public companies started as private enterprises before maturing and becoming household names.
Tony divides private equity into three different phases. First, there’s the early phase of venture capital, when investors potentially invest in startup organizations. If that startup develops into a business, that creates a growth equity opportunity.
Growth equity is an investment strategy that allows investors the opportunity to provide capital to the business as it’s approaching profitability and begins to be profitable. At this point, the business typically has some private equity backing that has helped it along, but the business begins looking for human capital and mentorship to receive guidance on how to get to the next stage, whether it’s in the form of an IPO or an M&A activity.
Another stage of private equity that many people think about is buyout opportunities. Buyouts occur when companies in the public domain are suddenly purchased by a private equity enterprise. When the private equity firm takes the company private and oftentimes disassembles it before emerging as a new enterprise, whether it’s in the public or private markets.
How Can Private Equity Invest in Private Enterprises?
There are a couple of options for how private equity can invest in private enterprises. One option is to be an investor, and another is to be an operator that comes in and has a say in the private enterprise’s operations.
In Tony’s book, he referenced some Google executives that he worked with while he was at Morgan Stanley. Tony shared that Larry Page and Sergey Brin came up with their vision for Google in the mid-1990s, but they needed some assistance in the early 2000s to take it to the next level.4
Enter Eric Schmidt, who was previously the CEO of Novell before becoming the CEO of Google.5 Schmidt arrived at Google in 1998 to help Page and Brin scale the business and prepare for Google to eventually go public in 2001.6 Shortly after becoming a public enterprise, Google acquired several businesses and built vertical businesses.
The Shift from Public to Private
While Google went public 25 years ago, Tony wants people to understand some important dynamics of how the marketplace has changed since then. As you can see below in Figure 1, the number of public markets has plummeted over the past three decades.
FIGURE 1 – Number of U.S. Public Companies – World Bank/WTW7
Meanwhile, the number of companies backed by private equity has skyrocketed over that same period.
FIGURE 2 – Public vs. Private Company Landscape – Citizens Bank8
Tony has also noticed that many companies are staying private for a longer period, and that some may decide to never go public. Companies can choose to enter the public domain and potentially receive a lot of criticism for how their earnings are generated. Their other option is to try to be nimble and remain private.
Tony referenced SpaceX as an example for this scenario. He posed the question whether Elon Musk would bring another company public and risk the possibility of facing backlash, or would Musk keep SpaceX private for the foreseeable future? With the abundance of capital available to SpaceX, Tony would be surprised if SpaceX decided to go public.
Factoring in the Public vs. Private Debate While Constructing Your Portfolio
As we assess this public vs. private debate, how does it relate to an investor’s portfolio? It’s important to understand that there are opportunities within both the public and private markets. At Modern Wealth, our investment management team keeps a close eye on market trends to help our advisors identify what investment opportunities are available for our clients. We want to make sure that our clients are aware of opportunities outside of the traditional stock and bond markets, as alternative investments may help with creating portfolio diversification.
The Long-Term Approach of Private Enterprises
One other thing that’s important to note when comparing public and private companies is the difference in growth strategy over time. Public companies might make decisions based on forecasts for the next quarter or maybe the next fiscal year. Those decisions are public knowledge and therefore open to widespread criticism.
Private companies, on the other hand, have the luxury of time on their side. They might not be as focused on earnings for the next quarter or two as long as they’re positioning themselves to execute a long-term strategy. Private companies don’t have that added pressure of facing public scrutiny since their decisions aren’t public facing.
Some of the younger companies might need a few years to execute their long-term strategy under a private domain rather than potentially needing to respond to shareholders on a quarterly basis. Franklin Templeton CEO Jenny Johnson also echoed those sentiments on an episode of Tony’s Alternative Allocations podcast.9 It’s via long-term strategy where opportunities can oftentimes be unlocked in the long run, deploying capital long-term.
For individuals who invest in private enterprises, there needs to be some sort of exit strategy in place. Private equity funders aren’t just going to hold their position forever.
When the investor’s money is put into a private equity fund, it then gets dispersed into several different investment opportunities. So, the money that has been invested can’t just be pulled out tomorrow. Can you see where this can become a challenge for investors from an exit strategy standpoint, especially if they’re not thinking long-term?
An “Illiquidity Premium”
This is where the term “illiquidity premium” comes into play. An illiquidity premium is an excess return that investors expect in return for having their money invested for a prolonged period of time. According to the CFA Institute, illiquidity premiums typically range anywhere from 2% to 5%.10
If you’re getting that much excess return, there’s a trade-off involved. That trade-off is giving the private equity fund manager a longer time horizon. Tony typically views an illiquidity premium as a seven-to 10-year investment.
Do you have the discipline to be willing to give up your capital for that long? Tony understands that it’s not an easy decision for investors to make. But that’s why this is just meant to serve as one component of an investor’s portfolio. How much capital do you feel comfortable tying up for that long? Maybe 10%? Fifteen percent?
Set however much you’re comfortable with aside as your illiquidity bucket. If there’s a shock to the market and you feel uncomfortable, you can take a little bit of risk out of your traditional portfolio and be more defensive. But for that 10%, 15%, or however much you want to put in that illiquidity bucket, remember that it is long-term capital. Rather than being afraid of having that capital tied up long-term, Tony and Dean hope that you’ll see the opportunities available in the private domain.
Private Credit
As we continue to discuss alternative investing, let’s shift gears to private credit. Dean believes that private credit is another area of alternative investing that can oftentimes be misunderstood. Private credit is lending and is comparable to fixed income. It involves lending capital to institutions for various needs.
What We Can Learn About Private Credit from the Great Recession
Let’s circle back to the Great Recession to try to get a better understanding of private credit. Tony recalls private credit being “a sleepy little part of the overall private market ecosystem” prior to the Great Recession. But after the Great Recession, traditional banks — the lender of choice — were hesitant to lend capital and stopped lending to small to middle market businesses. The traditional banks didn’t want to have risky assets on their balance sheet.
It was private credit firms that stepped in to lend that capital, marking the evolution of private credit.11 Tony points out that private credit firms primarily focus on those small to middle market opportunities and that they like capital. That’s direct lending.
Many people assume that all private credit is direct lending, but that’s actually not the case. While direct lending had benefited greatly from a lot of the void left by the banks, Tony shares that there are three primary ways to assess private credit: direct lending, asset-based finance, and commercial real estate debt. For asset-based finance, think about credit card receivables, royalties, music, or all sorts of infrastructure lending. Since there’s an asset base, there’s collateral, so the investor gets something in return.
From a commercial real estate debt perspective, that dives into the private real estate portion of this discussion about alternative investing that we’re about to get to. There is nearly $3 trillion of real estate that will need to be refinanced.12 Since banks are unlikely to lend capital, that’s where private credit managers can step in and lend capital in a selective and responsible manner.
Typical Terms on Private Credit
Again, diversification is key. Rather than loaning a lot of money to several different companies, Dean says to consider having 1% or less in any outstanding loans. For this to be an intriguing investment option, there needs to be a risk-return trade-off. Investors may want to seek income and structural protections depending on the terms of each lending arrangement, recognizing that risks remain. That’s where Tony sees the reward for allocated capital of private credit.
Tony has seen a shift over the past few years where private credit managers have gone from being “term takers” to “term makers.” When lending capital, private credit managers have been able to make sure that there are more protections available to them so they can protect their underlying investors.
Private Real Estate
When many people think about real estate, they oftentimes think about buying a home or publicly-traded REITs, which are generally available on the marketplace. Private real estate, on the other hand, typically involves offices, industrial complexes, multifamily housing, and big projects that involve buying capital. When dealing with institutional and family offices, it’s important to understand that private real estate has different risk return characteristics than what are generally available in the public market.
Tony shares that, historically, private real estate has exhibited attractive growth and income diversification. It has also historically moved in a different direction than traditional investments over time and has served as a potential inflation hedge.
While the office sector’s struggles have been thoroughly documented in recent years, and could continue to face challenges for the foreseeable future, Tony believes that areas like industrial and multifamily may offer potential opportunities depending on market conditions. With the reshoring of American manufacturing, more industrial manufacturing facilities will need to be built.
Private Infrastructure
Bridges, tunnels, and roads typically come to mind when people think about infrastructure. But from a private infrastructure standpoint, there are things like digital infrastructure and fiber optic cables, decarbonization and upgrading power grids, and deglobalization and supply chains moving back to America. How will goods and services need to be transported differently going forward?
Just like with comparing private and public real estate, private infrastructure is very different than publicly-traded infrastructure. Tony provided an example of publicly-traded infrastructure buying securities like Caterpillar Inc. Those tend to have a higher correlation and act much more like an equity surrogate.
Key Takeaways on Alternative Investing
As we wrap up this discussion on alternative investing, it’s important to understand that many of the opportunities within the private markets haven’t been available for who Dean often refers to as “the millionaire next door” until the past few years. Previously, these strategies were more exclusive to institutions and family offices. These structures were available for $5 million or more in investable assets and had very high minimums. That worked well for institutions, but not so much for individual investors who were seeking more diversification across the private market allocations.
Investment opportunities in the private markets are available to accredited investors or below and have minimums that can range from $500 to $10,000+.14 These opportunities are more widely available today than in the past, though availability depends on the specific offering.
Keeping a Long-Term Perspective and Diversified Approach
While these opportunities in the private markets have quarterly liquidity provisions, Tony still views them as long-term investments. That long-term perspective is important to have if you want to capture the long-term illiquidity premium.
In addition to thinking long-term when assessing opportunities in private markets, a diversified approach is key. Tony’s final takeaway was to consider diversifying your exposure across private equity, private credit, private real estate and infrastructure rather than making one single bet, which can be more volatile in nature.
If you have any questions about alternative investing and these various opportunities within the private markets, start a conversation with our team below.
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Resources Mentioned in This Article
[2] https://www.alternativesbyft.com/alternative-allocations-podcast
[3] https://www.amazon.com/Private-Markets-Building-Better-Portfolios/dp/139431308X
[4] https://about.google/company-info/our-story/
[5] https://www.forbes.com/profile/eric-schmidt/
[7] https://www.wtwco.com/en-hk/insights/2025/02/the-shrinking-public-market-what-investors-need-to-know
[8] https://www.citizensbank.com/corporate-finance/insights/private-equity-trends.aspx
[9] https://www.youtube.com/watch?v=ccfp3xHSo6U
[11] https://franklintempletonprod.widen.net/content/vdgixbzupw/pdf/the-evolution-of-private-credit.pdf
[12] https://www.gao.gov/products/gao-24-107282
[13] https://www.perenews.com/the-office-sectors-long-fall-from-grace/
[14] https://stockanalysis.com/article/private-market-investing/
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The views expressed represent the opinion of Modern Wealth Management a Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.