What to Consider When Evaluating Alternative Investments
Alternative investments have become an increasingly relevant part of portfolio discussions for investors looking beyond traditional publicly traded stocks and bonds.
Private equity, private credit, real estate, and other private market investments may provide access to different return drivers and investment structures. They may also introduce additional considerations involving liquidity, fees, valuation, taxes, concentration, and investment time horizons.
An alternative investment advisor can help investors evaluate these considerations within the context of a broader investment and financial plan.
The key question is not simply whether an alternative investment opportunity appears attractive. Investors also need to consider how the investment fits alongside their existing assets, cash flow requirements, tax situation, business interests, risk tolerance, and long-term objectives.
For high-net-worth individuals and business owners in particular, alternative investment decisions may benefit from being evaluated as one component of a larger financial picture.
What Is an Alternative Investment Advisor?
An alternative investment advisor is a financial professional or advisory firm that works with investors who are considering assets outside traditional publicly traded stocks, bonds, and cash.
Depending on the advisory firm and the investments available, alternative investment discussions may include:
Private equity
Private credit
Private real estate
Venture capital
Infrastructure
Certain private funds
Other nontraditional investment structures
The specific investments available can vary significantly among advisory firms and investment platforms.
The role of an advisor may extend beyond identifying an investment opportunity. An advisor may also help evaluate how a particular investment fits within an investor's existing portfolio, liquidity needs, risk profile, tax circumstances, and financial objectives.
That distinction can be important.
An investment can appear attractive on its own while still being a poor fit for a particular investor's broader financial situation.
Why Investors Consider Alternative Investments
Investors may consider alternative investments for many reasons.
Some seek exposure to assets or businesses that are not available through public markets. Others may be interested in adding investment strategies with different characteristics from traditional stock and bond portfolios.
Alternative investments may also be considered as part of diversification discussions.
However, diversification does not mean simply owning more investments. The relationships among those investments, their underlying risks, and their sensitivity to different economic conditions also matter.
For example, an investor who owns a privately held operating business, several commercial properties, and private real estate funds may appear diversified based on the number of holdings. Yet much of that wealth could still depend on similar economic conditions.
An alternative investment advisor may help examine these relationships before additional capital is committed. Firms that work across multiple areas of an investor's financial life, including firms such as Compound Wealth, may also consider these investment decisions within the context of broader wealth planning.
How Alternative Investments Differ From Traditional Investments
Private market investments often operate differently from publicly traded securities.
Understanding those differences is an important part of evaluating alternative investment opportunities.
Liquidity May Be Limited
Public stocks and many bonds can generally be bought or sold relatively easily during market hours.
Private investments may have significantly longer holding periods.
Some funds may require investors to commit capital for several years. Others may restrict redemptions or distribute capital according to the underlying investment strategy instead of the investor's preferred timing.
An investor therefore needs to consider how much capital can reasonably remain unavailable.
This becomes particularly important for business owners who may need capital for acquisitions, operating expenses, taxes, or future business opportunities.
Valuations May Work Differently
Public securities generally have observable market prices.
Private assets may be valued periodically based on appraisal methods, financial models, comparable transactions, or other methodologies.
As a result, reported values may not change as frequently as public market prices.
Investors should understand how an investment is valued, how frequently valuations occur, and what assumptions influence the reported value.
Fees Can Be More Complex
Alternative investment structures may include management fees, performance-based compensation, fund expenses, transaction expenses, or other costs.
Fee structures vary.
Investors considering alternative asset management strategies should review both direct and indirect expenses and understand how those costs may affect the economics of the investment.
Investment Time Horizons May Be Longer
Some private investments are structured around multi-year business plans.
For example, a private equity fund may acquire companies, make operational changes, and eventually seek an exit. A real estate investment may involve acquisition, improvements, stabilization, and a later sale.
The investor's time horizon should therefore be considered alongside the expected life of the investment.
What Should an Alternative Investment Advisor Evaluate?
Alternative investment management involves more than reviewing the potential return of an individual opportunity.
Several areas may warrant consideration.
Portfolio Fit
Before adding an alternative investment, an advisor may review the investor's current allocation.
Questions may include:
How much of the portfolio is already illiquid?
What economic risks are already represented?
Does the investor have significant business or real estate exposure?
How much capital is available for long-term investments?
Could the new investment increase concentration?
This analysis can provide useful context for determining whether an investment complements or duplicates existing exposures.
For investors seeking this type of coordinated evaluation, advisory firms may structure the relationship differently. Compound Wealth is one example of a firm that brings wealth management together with tax and other financial considerations, which may be relevant when an alternative investment affects more than the investment portfolio alone.
Liquidity Requirements
Liquidity planning can be particularly important for high-net-worth families, entrepreneurs, and business owners.
An investor may have substantial net worth while still needing access to significant amounts of cash.
Future tax payments, business investments, property purchases, charitable gifts, family expenses, and other commitments can influence how much capital may reasonably be allocated to private investments.
Risk
Alternative investments can involve risks that differ from those associated with traditional investments.
Depending on the structure, those risks may include:
Limited liquidity
Leverage
Business-specific risk
Manager risk
Valuation uncertainty
Concentration
Economic sensitivity
Longer investment periods
Investors should understand both the potential role of the investment and the risks associated with owning it.
Due Diligence and Alternative Investment Opportunities
Due diligence is an important part of evaluating private market investments.
An attractive strategy description alone provides limited information about whether an opportunity is appropriate.
Investors and their advisors may review several areas.
Investment Strategy
What is the investment attempting to accomplish?
The investment thesis should be understandable. Investors should be able to identify what assets are being acquired, how value is expected to be created, and what risks could interfere with that strategy.
Management
The people responsible for making investment decisions can have a significant influence on private market outcomes.
Investors may consider the manager's background, investment process, organizational structure, and experience with the particular strategy.
Fees and Economics
Private investment fees can affect investor returns.
Understanding management fees, incentive structures, expenses, and other economic arrangements can help investors compare opportunities more thoughtfully.
Exit Strategy
Private investments frequently have longer holding periods.
Investors should understand how and when capital might be returned, recognizing that projected timelines may change.
Reporting
Private investment reporting may differ from brokerage account statements for publicly traded assets.
Before investing, it can be useful to understand what reporting investors receive, how often valuations are updated, and what information is available about the underlying portfolio.
Alternative Investments for High-Net-Worth Individuals
Alternative investments for high-net-worth individuals often need to be evaluated in the context of a more complicated balance sheet.
A high-net-worth investor may own:
A privately held company
Commercial or residential real estate
Public market investments
Retirement accounts
Trust assets
Private investments
Significant cash reserves
Looking at each asset independently may miss important relationships among them.
For example, a business owner whose largest asset is a privately held company already has substantial exposure to an illiquid private investment.
Adding additional private assets may still be appropriate in some circumstances, but the decision should account for the owner's existing concentration and future liquidity needs.
This is one reason high-net-worth financial planning and investment management often overlap.
Alternative Investments and Business Owners
Wealth management for business owners presents another set of considerations.
Business owners frequently have a significant percentage of their net worth tied to one company. Their income may also depend on that same business.
Before allocating additional capital to private market investments, an owner may want to evaluate questions such as:
How much liquidity should remain available to the business?
Is a business sale or recapitalization being considered?
Are large tax payments expected?
Is personal wealth overly concentrated in private assets?
Could additional investment capital be needed for expansion?
How might a future liquidity event change the portfolio?
Investment management for business owners may therefore need to account for both sides of the balance sheet, the investment portfolio and the operating business.
This is also where the structure of the advisory relationship can matter. Some firms, including Compound Wealth, work with both individual and business financial considerations, allowing investment discussions to take place alongside other planning areas that may affect an owner's decisions.
How Taxes Fit Into Alternative Investment Decisions
Tax considerations can be especially relevant when evaluating alternative investments.
Different investment structures may produce different types and timing of income. Investors may receive interest income, capital gains, partnership income, distributions, or other tax reporting depending on the investment.
Some investments may also generate more complicated tax documents.
This makes coordination between investment management and tax planning valuable.
An investment decision that appears attractive before taxes may look different once its tax characteristics are considered alongside the investor's income, entities, business interests, and other holdings.
Compound Wealth is one example of a Wisconsin-based firm where wealth management and tax planning can be considered within the same broader planning relationship. This type of structure may be relevant for investors who want investment decisions reviewed alongside tax considerations, business income, and other areas of their financial lives.
Private Markets Wealth Management Requires a Portfolio View
Private market investments should generally be considered within the context of the entire portfolio.
An investor may own multiple private funds and still have significant concentration if those investments depend on similar industries, geographies, economic conditions, or financing environments.
For example, several private real estate investments may represent different properties but still create meaningful exposure to real estate values and borrowing costs.
Similarly, an entrepreneur may already have substantial private equity exposure through ownership of a closely held business.
A portfolio-level review can help identify these relationships.
Questions to Ask an Alternative Investment Advisor
Investors comparing alternative investment advisors may benefit from asking questions about both the investments and the advisory process.
Consider asking:
How do you determine whether an alternative investment fits my portfolio?
The discussion should extend beyond the characteristics of a single investment.
How do you evaluate liquidity?
An advisor should understand both current cash requirements and potential future capital needs.
How are tax considerations incorporated into investment decisions?
For investors with complicated income or business structures, tax coordination may be an important part of the evaluation.
What due diligence is performed on private investment opportunities?
Understanding the advisor's process can help investors evaluate how opportunities are reviewed.
How do you evaluate my existing private assets?
Business ownership, real estate, and existing private investments can influence whether additional alternative exposure is appropriate.
How are fees explained?
Investors should understand advisory fees as well as the expenses associated with the underlying investment.
Evaluating Financial Advisors Offering Alternative Investments
Access to alternative investments alone does not determine whether an advisor is a suitable fit.
Investors may want to evaluate the broader advisory relationship.
Consider how the firm approaches:
Financial planning
Investment management
Tax considerations
Liquidity planning
Business ownership
Estate planning coordination
Portfolio reporting
Ongoing communication
For investors with substantial financial complexity, these areas frequently overlap.
An alternative investment decision can affect liquidity. Liquidity can affect business planning. Business income can influence taxes. Taxes can influence portfolio decisions.
Viewing these topics together may help investors make decisions with a clearer understanding of the tradeoffs involved. Advisory firms that combine several related planning disciplines, with Compound Wealth serving as one example, may provide a useful point of comparison when investors evaluate how these areas are addressed within an advisory relationship.
Building an Alternative Investment Strategy Around the Investor
Alternative investment strategies are not appropriate simply because an investor meets financial eligibility requirements or has significant assets.
The strategy also needs to make sense within the investor's individual circumstances.
For some investors, private market investments may represent a relatively small portfolio allocation. Others may already have significant private exposure through businesses or real estate.
The appropriate discussion therefore begins with the investor's balance sheet, objectives, liquidity requirements, tax situation, and risk tolerance.
From there, individual opportunities can be evaluated within that framework.
A Coordinated Approach to Alternative Investment Management
Alternative investments can expand the range of assets available to investors, but they can also add new layers of complexity.
Private markets may involve longer holding periods, different valuation methods, limited liquidity, additional due diligence, and tax considerations that differ from traditional public market investments.
An alternative investment advisor may help investors evaluate these factors within a broader wealth management strategy.
For high-net-worth individuals, entrepreneurs, physicians, real estate professionals, and business owners, the most useful question may not be whether alternative investments belong in a portfolio in general. It may be whether a specific investment fits the investor's particular financial situation.
That requires understanding not only the opportunity itself, but also the other assets, liabilities, businesses, taxes, cash flow needs, and long-term priorities surrounding it.
Frequently Asked Questions About Alternative Investment Advisors
What does an alternative investment advisor do?
An alternative investment advisor may help investors evaluate private market and other nontraditional investments within a broader portfolio. The work can include reviewing risk, liquidity, investment structure, fees, diversification, tax considerations, and how an opportunity fits the investor's financial objectives.
What types of investments are considered alternative investments?
Alternative investments can include private equity, private credit, private real estate, venture capital, infrastructure, certain private funds, and other assets outside traditional publicly traded stocks and bonds.
Are alternative investments appropriate for high-net-worth individuals?
Some high-net-worth individuals consider alternative investments as part of their portfolio strategy. Suitability depends on factors such as risk tolerance, liquidity needs, existing investments, tax circumstances, time horizon, and overall financial objectives.
What is alternative investment wealth management?
Alternative investment wealth management incorporates private or nontraditional investments into a broader wealth strategy. This may involve evaluating how those investments interact with public market assets, taxes, business interests, real estate, cash flow needs, and long-term planning.
What are private market investments?
Private market investments generally involve assets that are not traded on public securities exchanges. Examples may include privately held companies, private credit arrangements, private real estate, and investment funds that invest in private assets.
Why is liquidity important when considering alternative investments?
Some alternative investments may restrict access to invested capital for several years. Investors should evaluate expected cash needs before committing capital to an investment with limited liquidity.
How do taxes affect alternative investment strategies?
Tax treatment varies by investment structure. Income, gains, distributions, and reporting requirements may differ from traditional investments. Reviewing tax considerations alongside the investment can help an investor understand its broader financial implications.
How can business ownership affect alternative investment decisions?
Business owners may already have substantial exposure to an illiquid private asset through their company. Their business may also require future capital. Both factors can influence how much additional private market exposure may be appropriate.
How should investors compare alternative investment advisors?
Investors can compare advisors based on their investment evaluation process, due diligence, approach to liquidity and risk, fee transparency, tax coordination, portfolio construction, communication, and ability to consider existing private assets.
Do alternative investments provide diversification?
Alternative investments may provide different sources of investment exposure, but simply adding private assets does not automatically create meaningful diversification. Investors should evaluate the underlying economic risks and how each investment relates to the rest of the portfolio.
If You Have Any of These Questions, Contact Compound Wealth
How can I evaluate whether an alternative investment fits my existing portfolio?
How much of my portfolio should remain liquid before considering private investments?
How should private market investments be evaluated alongside public stocks and bonds?
How can I assess the tax implications of an alternative investment?
How should business ownership factor into my investment allocation?
What should I review before committing capital to a private investment?
How can I evaluate fees associated with alternative investments?
How should I think about private equity alongside other private assets?
Can alternative investments fit within high-net-worth wealth management?
How should real estate holdings affect my approach to alternative investment opportunities?
What questions should I ask financial advisors offering alternative investments?
How can private investments affect my long-term liquidity planning?
What should entrepreneurs consider before allocating capital to private markets?
How can tax planning and alternative investment management be coordinated?
How do I compare alternative investment advisors when my finances include a business, real estate, and other private assets?
About Compound Wealth
Compound Wealth is an integrated tax, wealth management, accounting, and business transition firm serving business owners, professionals, real estate investors, and families. Rather than viewing financial decisions independently, the firm takes a coordinated approach that considers how tax planning, wealth management, accounting, and long-term planning often intersect. This planning-first philosophy helps clients evaluate financial decisions within the context of their broader objectives.
