Private market investments have been steadily growing in popularity among investors, with many investors increasingly including them as part of a well-diversified investment portfolio. If you’re left scratching your head and are unsure what ‘private market investments’ or ‘alternative investments’ are, then read on.
In this article, we outline private market and alternative investments, how they differ from traditional investments, and the important role they can play in a well-balanced investment portfolio.
Understanding private market and alternative investments
Investopedia defines an ‘Alternative Investment' as “a financial asset that does not fall into one of the conventional investment categories”. While conventional or traditional investments are often classified as stocks, bonds and cash, an alternative investment includes things such as real estate, private equity, private credit, hedge funds, and venture capital.
Key differences between private market and alternative investments and traditional investments
Unlike many traditional investments, private market and alternative investments may carry a higher level of risk and potential return. Some of their different characteristics include:
- Liquidity: Private market and alternative investments are often less liquid than traditional investments, meaning it can be harder to value and sell them. However, this can mean more price stability as they are less dynamically priced, and the price is less impacted by global market forces
- Risk and return profile: Private market and alternative investments may offer less liquidity as they are often in the earlier stages of development and not yet publicly traded. However, they can offer greater potential for future growth and higher returns over the long term
- Market correlation: Private market and alternative investments often have a lower or even no correlation with traditional investments, which can make them a valuable part of a well-diversified investment portfolio
- Higher minimum investment: Private market and alternative investments have historically been utilised most by large institutional and professional investors and can come with a higher minimum investment threshold than some traditional investments. This can make them less accessible to a wider investor audience
- Fees: Private market and alternative investments may charge higher fees because they are less commoditised and often harder to access. However, they can often deliver higher returns, which can offset the higher fees charged.
Factors to consider before investing in private market and alternative investments
Before you make an investment, we recommend you talk to a financial advisor about your financial situation and evaluate your risk appetite. Private market and alternative investments can carry a higher level of risk and may require a larger investment, so it is important to ensure that you are comfortable with the level of exposure and the associated financial risk before taking the plunge.
We also encourage you to review how private market and alternative investments align with your wider financial goals. Due to their lower liquidity profile, it’s important to be aware that it may take longer to see a return on investment or be harder to sell these investments if you need to free up funds.
Finally, it’s important to carry out proper due diligence before making an investment. This should involve thorough research into the investment opportunity, ensuring you understand the investment structure, associated fees, and the potential risks. If in doubt, talk to a financial advisor.
