What are alternatives?

Private equity represents investments in different stages across a company life-cycle, from early-stage venture capital to later-stage growth investing and corporate finance.

Types of private equity exposure 

Direct PE fund

• Raised and managed by a private equity firm to invest in underlying companies.
• Potential benefits: Direct access to GPs, and the ability to diversify across GPs and strategies. General Partner (GP), an investment entity or individual, makes the investment decisions and manage the day-to-day operations of a fund.
• Considerations: Investors are responsible for manager due diligence, and direct PE funds typically have high minimum investments.

PE fund of funds

• Pools capital to invest in several other direct private equity funds and co-investments.
• Potential benefits: Greatest diversification of all private equity exposures, and smaller investment requirements.
• Considerations: Potential for over-diversification and limited contact with GPs of underlying funds. This can be mitigated by delegating control to an experienced PE manager.

Direct co-investment Fund

• Executes minority investments directly in companies alongside lead sponsors.
• Potential benefits: Greater diversification vs. a direct PE fund and potential for higher returns and fee savings.
• Considerations: Quality of the co-investment manager’s deal flow and transaction expertise of the manager.

There are many types of credit products across the public and private markets (including corporate bonds, bank loans and structured products) that provide a wide range of investment options for investors. We will focus on Private Credit, which represents the broader private market’s alternatives universe. Private Credit encompasses non-traditional investments relying on an illiquidity premium and a complexity premium to help drive excess returns.

Types of credit strategies

Direct lending

Provides debt financing to high-quality, private companies using a long-only strategy with moderate illiquidity and income focus.

Opportunistic debt

Profits by allocating in a range of securities and markets wherever managers see greatest value. Opportunistic investments can be premium due to complexity or illiquidity.

Special situations/distressed debt investing

Invests capital in the existing debt of a financially-distressed company, government or public entity.

Hedge funds often invest in public markets, and have the flexibility to employ alternative trading techniques to manage overall exposure, such as “short-selling”. By deploying various financial instruments or market strategies, hedge funds offset risks and provide downside protection¹

Examples of hedge fund strategies

Long/short equity

This strategy focuses on buying and selling stocks based on fundamental valuations. An example strategy is “paired trades”. Post crisis regulation in the US Favors large banks over small banks, so a long position in a large bank and a short position in a small bank results in low/zero exposure to banks and a profit if the large bank outperforms and the small bank underperforms.

Event-driven

Event driven strategies, which can include special situations, opportunistic or other sub-strategies, look to capitalize on corporate events, such as announced mergers.

Multi-strategy hedge funds

Apply various strategies and implement diversification to smooth returns, reduce volatility, and decrease asset-class and single-strategy risks.

Investing in real estate is attractive due to the stability and predictability of the cashflow it can provide (relative to other asset classes) and long term potential capital growth opportunities. Real estate also has a low and sometimes negative correlation with other assets class returns and can therefore be a good way of creating diversification across an investment portfolio.

Examples of real estate equity

Core

Invests mainly in income producing existing buildings. The fund will use low leverage, have no or very low development exposure and generate a high proportion of return through income. Tenants in these buildings are typically corporate or institutions with strong credit ratings. Lease terms are also typically 5 years or more, which provide income certainty.

Core +

Provides a combination of both ‘growth and income’ and is associated with a low to moderate risk profile. Core plus property owners typically can to increase cash flows through light capital works to enhance the asset appearance, operating costs or by increasing the quality of the tenants and rental income. Similar to core properties, these properties tend to be of high-quality and well-occupied.

Value add

Invests in any property type and aims to generate returns from a balance of rental income and capital appreciation. The fund may allocate part of its investments into development projects. Typically, the fund will also focus on actively managing the property and the property’s income stream such leasing vacant space to reduce occupancy, repositioning or redeveloping the layout to make it more attractive to tenants and therefore increase rent.

Opportunistic

An opportunistic real estate fund typically uses high leverage, has a high exposure to development or existing buildings which require active asset management, aiming to deliver returns primarily in the form of capital appreciation.