Types of Alternative Investments

Private Equity

Private equity is a type of investment that involves buying and selling ownership shares in private companies—businesses that are not publicly traded on the stock market. Instead of buying stocks in big companies that anyone can invest in, private equity focuses on smaller or private companies that aren't available to the general public. Private equity can come in different forms, depending on the type of investment:

• Venture Capital (VC): Venture capital focuses on investing in early-stage companies, usually startups, that show high growth potential but lack access to capital from traditional sources like banks due to their high risk. VC firms typically provide not just capital but also strategic guidance, operational expertise, and access to their networks.

• Growth Equity: This type of private equity involves investing in established companies that are looking to grow. Investors provide the capital in exchange for ownership stakes, betting that the company’s growth will increase its value.

• Leveraged Buyouts (LBOs): In an LBO, private equity firms buy a company by using a combination of their own money and borrowed funds (leverage). The idea is to take control of the company, improve its operations, and then sell it at a higher value later on.

• Mezzanine Capital: This is a hybrid type of investment that falls between debt and equity. In mezzanine financing, investors provide loans to a company that can be converted into equity if the loan isn’t repaid.

• Real Estate Private Equity (REPE): This form of private equity focuses on investing in real estate. Private equity firms buy properties or real estate companies with the goal of increasing the value of the properties and selling them for a profit. Investors in REPE funds can benefit from both the income generated by the real estate (like rent) and any increase in property value over time.

Private Debt/Credit

Private credit, also known as private debt, is a type of investment that involves buying and selling loans and debt securities in private companies—businesses that are not publicly traded. Instead of investing in publicly traded bonds or taking out loans through banks, private credit involves lending money directly to companies or buying their debt.

There are different forms of private credit, each with its own characteristics:

• Direct Lending: In direct lending, a lender provides a loan directly to a borrower, without involving a bank or any other middleman. These loans are typically given to small and medium-sized businesses (SMBs) that may not have access to traditional bank loans, often because they are considered higher risk.

• Distressed Debt: Distressed debt refers to loans or bonds issued by companies that are struggling financially and are considered below investment grade. Investors in distressed debt are essentially betting that the company will recover and that the value of its debt will increase.

• Mezzanine Debt: Mezzanine debt is a mix between senior debt (which is paid off first if the company defaults) and equity. It's often used to finance large transactions like leveraged buyouts, where the borrower’s credit rating isn’t strong enough to secure senior debt alone.

• Venture Debt: Venture debt is a type of loan provided to early-stage companies, usually by venture capital firms. It's often used to help startups bridge the gap between funding rounds. While the interest rates on venture debt are typically lower than those offered by traditional banks, the risk of default is higher, as these companies are often young and not yet profitable.

Real Assets

Real assets investing involves buying physical assets rather than traditional financial assets like stocks and bonds. These types of investments tend to be more stable and can provide long-term returns, as they are generally less volatile than the stock market.

Here are the main types of real asset investments:

• Real Estate: This involves buying property, such as office buildings, retail spaces, apartments, or industrial buildings. Real estate can provide steady income through rent and may increase in value over time. Investors can invest in real estate either through private funds or publicly traded markets.

• Infrastructure: This refers to investing in essential physical systems like transportation networks (roads, bridges, airports), communication networks (telecoms, data centers), or utilities (water treatment plants, energy pipelines).

• Natural Resources: These investments involve buying commodities like oil, gas, metals (gold, silver, copper), or agricultural products. Natural resources can offer stability and long-term returns, especially as the demand for these resources often remains strong over time.

• Collectibles include items like art, rare coins, and vintage cars. These items can increase in value, especially if they become rare or gain historical significance.