Best investment options: 7 alternatives for experienced investors
For sophisticated investors and high-net-worth individuals, a number of investment options are available in the UK to help with achieving a number of different investment goals - each with varying degrees of risk and target returns - and some of which are particularly attractive for experienced and high-net-worth individuals (HNWIs) displaying an increased appetite for risk.
Balancing alternative investment options, such as venture capital, private equity and property, with traditional investment routes, such as listed equities and bonds, can be an effective method for investors to achieve portfolio diversification and manage the level of risk and target returns within their overall investment portfolio.
In turn, exploring the opportunities available for UK investors can be a crucial step in building a personalised, growth-focused portfolio.
Where tax-efficient investment opportunities, such as into companies qualifying for the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS), may be the best investment options for sophisticated UK investors looking to diversify into venture capital, maintaining a focus on traditional equity investments is still likely to be a suitable strategy for a wide range of investor profiles.
Investment options for experienced investors to explore:
EIS- and SEIS-qualifying companies
Traditional listed equities
Joint venture property investments
The above list includes both alternative and traditional investment options, some of which are eligible for generous tax-efficient wrappers, and others which can target superior investment returns. Each option poses different risks and potential rewards, but the best options for an individual investor will depend on their own circumstances and investment goals.
Please note that the information on this page is not advice or a recommendation to invest, or refrain from investing, in any specific product or industry. The information is purely educational.
1. Venture capital
Venture capital (VC) involves investing in unlisted early-stage businesses with strong growth potential, and can often be a highly rewarding investment option for HNWIs and experienced investors.
VC opportunities can provide investors with the ability to support young, innovative startups whilst targeting superior financial returns, and also potentially facilitating positive economic, social and environmental change.
Investors could receive considerable returns from venture capital investments due to accessing companies at an earlier stage of growth than more mature private equity opportunities, for example. As a result, VC investors can often benefit from greater investment growth.
However, it must be noted that VC is a high risk/high return investment strategy. But, some of the associated risk can be mitigated - to an extent - if the opportunity qualifies for generous tax reliefs offered by certain schemes, such as the EIS and SEIS.
In the UK, venture capital funding in Q1 2022 alone totalled approximately £7.3 billion, up from £2 billion in Q1 2018, according to a survey conducted by KPMG and PitchBook.
This growing accessibility and popularity of VC, particularly in regions outside of London, is paving the way for innovation and economic growth alongside superior return potential for investors. For example, 25 UK-based companies each achieved unicorn status (a valuation of over $1 billion, approximately £820 million) in 2021 – and 35% of all business unicorns in the UK are based in regions other than London.
UK startups are reaching unicorn status at a faster rate than ever before, largely driven by the maturing venture capital industry. Early access to large amounts of financing, as well as mentoring and business networks, can enable startup companies to accelerate their growth, realise their potential, and reach significant valuations at a very young age.
Ultimately, this can create further potential for some early-stage venture capital investors to receive high financial returns, presenting UK venture capital as an increasingly attractive space to invest in.
2. Private equity
Private equity (PE) is the wider asset class that encompasses venture capital, as well as private investment into later-stage companies. This can be an important investment option to consider adding to your portfolio, particularly if you are aiming to avoid becoming over-reliant on listed equities.
Generally, venture capital can be considered as having a particularly high risk/return profile, whereas equities listed on major stock markets, due to representing more mature companies, are often viewed as less risky investments than those in the VC space.
Later-stage private equity can offer a middle ground between these two asset classes.
Whilst still investing into unquoted companies, and usually still offering the potential for investors to target superior returns, more mature private companies can be accessed via private equity and therefore potentially offer lower risk levels than those associated with early-stage venture capital.
Ultimately, investing in a range of opportunities with differing risk levels can be an effective method of constructing a diverse portfolio. Private equity can help investors mitigate cyclical risk and public market risk, whilst still providing access to mature companies with an established customer base and revenue stream.
3. EIS- and SEIS-qualifying companies
The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) were introduced by the UK government in 1994 and 2012, respectively, with the primary aim of attracting private investment to UK-based startups and scaleups.
The schemes have both been highly successful, with the EIS attracting £25.6 billion of capital for almost 37,000 companies since its introduction, and the SEIS attracting £1.5 billion of investment for almost 16,000 early-stage startups in just 10 years. The schemes act as an incentive to invest in emerging UK enterprise by offering investors a range of generous tax reliefs, including up to 50% income tax relief, capital gains tax exemption and inheritance tax relief.
The difference between the two schemes is that the EIS has less stringent eligibility criteria, and is open to more established startups and scaleups, whereas the SEIS is more focused on ‘seed stage’ startups, and therefore offers investors a more generous set of tax reliefs to offset the additional risk.
Although, as of April 2023, the SEIS eligibility criteria is set to become more inclusive, as first announced in the Mini-Budget 2022 and reiterated in the Chancellor’s Autumn Statement.
Overall, investing in EIS- and SEIS-qualifying companies can be a useful option for investors to maximise the potential gains of investing in startups, whilst minimising the potential risks and losses. The numerous tax reliefs available via these schemes could help to protect experienced investors from the higher levels of tax expected to be levied by the UK government from 2023, as many thresholds are reduced and some rates are frozen for another five years.
4. AIM ISAs
Launched in 1995 to replace the Unlisted Securities Market, the Alternative Investment Market (AIM) is a smaller branch of the London Stock Exchange.
AIM enables investors to buy and sell shares of relatively small, early-stage companies via a minor stock exchange. The companies listed on AIM often display high growth potential, especially compared to more mature firms quoted on mainstream stock markets.
On another note, an ISA (Individual Savings Account) allows individuals to allocate up to £20,000 annually across the full range of ISA products (including the Stocks and Shares ISA, Innovative Finance ISA, Cash ISA and Lifetime ISA), and receive any returns free of income tax and capital gains tax. Whilst ISAs can be beneficial for investors from a tax perspective during their lifetime, some investors are unaware of the potential inheritance tax (IHT) implications of investing in an ISA.
Generally, ISAs lose their tax-free status upon their owner’s passing. This means that the beneficiary of the ISA may have to declare it in their tax return, with the asset potentially becoming liable to 40% inheritance tax if your estate exceeds the current inheritance tax nil-rate band (£325,000).
As of August 2013, AIM shares can be held within a Stocks and Shares ISA (known as an AIM ISA). This can enable investors to benefit from tax-free income and capital gains on the shares during their lifetime, and pass on AIM shares free of inheritance tax upon their passing (provided the shares have been held for at least two years and are still held at the time of passing).
Holding an ISA that is not subject to IHT is possible because many companies listed on AIM can qualify for Business Property Relief (BPR), a scheme that was introduced in 1976 to enable some businesses and shares to be passed on free of inheritance tax.
Investors can make new AIM ISA investments each year, subject to the current maximum ISA allowance (£20,000), or transfer existing ISAs (unlimited amounts) into AIM portfolios.
Investing via AIM can offer investors the potential to achieve considerable returns, facilitate the scaling up of early-stage companies, and capitalise on significant tax-benefits.
Although, it is important to note that an AIM ISA strategy may be more risky, more volatile and less diversified than a traditional Stocks & Shares ISA portfolio. Notably, you are investing in companies subject to less stringent regulation than those quoted on major stock exchanges.
And compared to direct venture capital investments via the EIS and/or SEIS, investors can only allocate relatively small amounts of capital to AIM ISAs.
Notably, the maximum annual investment allowance for an AIM ISA is £20,000, whereas for the EIS, this figure is £1 million (or £2 million, if additional capital is invested in Knowledge-Intensive Companies [KICs]). And for the SEIS, even with its stricter criteria, the annual investment allowance is set to double from £100,000 to £200,000 as of April 2023.
The comparatively higher investment allowances associated with the EIS and SEIS could potentially offer more significant scope for superior returns when compared with an AIM ISA, as more initial capital can be invested.
Importantly, tax rules can change, and the availability of tax relief depends on AIM ISA companies maintaining their BPR-qualifying status. Should they lose this, IHT relief would also be lost for investors.
5. Traditional listed equities
Investing in traditional listed equities (or stocks and shares) often plays a role in most investment portfolios, and is likely to be a suitable option for many investors.
This type of investment, alongside bonds, is one of the most commonly adopted by investors, and is generally viewed as being relatively less risky than investing in AIM-listed companies and unlisted companies. This is due to traditional listed companies usually being more established.
However, this means that the return potential associated with equities listed on main stock exchanges, such as the London Stock Exchange or the New York Stock Exchange, is often not as substantial as the return potential of earlier stage alternative investments, such as venture capital and private equity.
Ultimately, when comparing traditional listed equities with those listed on sub-exchanges or investments into unlisted companies, it should be noted that three of the main differences lie in the following areas:
Traditional equities tend to be relatively liquid investments whilst alternative equities can be less liquid.
The value of traditional stocks are highly influenced by public market movements, whereas alternatives are generally uncorrelated to public markets. A calculated balance of each could therefore offer investors a suitable level of portfolio diversification.
Traditional equities tend to be more highly regulated than AIM-listed equities or investments in unquoted companies. This can mean that more thorough due diligence and expertise may be required for alternative equity investments, but this does not detract from the fact that traditional investments also require thorough due diligence.
Traditional listed equities could be an important investment option for investors seeking a relatively straightforward opportunity that requires little involvement and expertise.
Listed equities can contribute to an effectively diversified portfolio, especially if a range of companies, industries, and nations are targeted to achieve a calculated spread of risk. This could be achieved either by selecting a diverse range of individual companies, or by investing into an exchange-traded fund (ETF), and could be enhanced further by targeting a mix of both traditional and alternative equities.
6. Property bonds
Property bonds (or loan notes) are issued by property developers to raise capital from investors in the form of a loan. Bonds are usually issued for a fixed term – generally two to five years – and are used to help finance the development of residential or commercial property projects.
Target interest rates currently offered by UK property bonds can range between 4% and 15%, suggesting that this form of alternative property investment can be an attractive investment option for investors seeking a more indirect method of accessing the property market.
The comparatively higher interest rates offered by property bonds can also make this investment option an attractive alternative to traditional investment options, such as government bonds, which have consistently yielded below 4% interest in recent years.
When investing into property bonds, investors receive a bond certificate and usually benefit from security over the underlying asset (property or land, for example) by way of a first or second-ranking legal charge. Second charge provides extra security, and so target interest rates – whilst they can still be generous – are often relatively lower as they don't carry the same higher-level risk profile.
At the end of the fixed-term, if the project has gone to plan, investors will see the return of their original capital, as well as any interest accumulated (unless they opted to receive interest payments on a monthly, quarterly or annual basis, which can be possible, depending on the bond issuer).
7. Joint venture property investments
Another form of indirect property investment, known as a joint venture (JV) property investment, has proven to be an increasingly popular option for investors in recent years.
Enabling investors to combine their capital with the industry expertise of property developers, JV property investments involve two or more parties working together to fund and build much-demanded property projects, offering investors an indirect route into this alternative asset class.
When investing equity into a JV opportunity, base case returns can usually stand at around 1.5x money-on-money (or 50%), although this does vary from project to project.
Notably, the ability to gain exposure to property whilst not being directly involved with the physical construction, renovation and/or maintenance of property can be highly attractive for experienced investors who may prefer a more ‘hands-off’ role.
With demand for property in the UK still markedly exceeding supply, investors could access the opportunity and not only benefit from superior growth potential, but also generate positive social impact by helping to tackle the UK’s chronic housing shortage.
Although – as with all investments – the risk of losing capital is present, the possibility of this outcome could be minimised, to some extent, by ensuring the property investment team have a proven track record and the necessary expertise for the project to be successful.
Sufficient due diligence should be carried out by investors to fully understand the risk/reward profile of the opportunity under question.
In addition, investor capital is typically required in a JV property investment for up to two years (with the average payback period for most JVs between 18 and 24 months), so investors should be willing and able to experience reduced liquidity for the estimated investment timescale.
Ultimately, joint venture property investments could display a significant opportunity for investors keen to target considerable returns, invest in property without the burden of additional costs and regulation, and diversify their portfolio against an increasingly fluctuating economic landscape.
How to choose the right investment options for your portfolio
When researching investment options, it is important to identify and select opportunities based on a number of factors relating to their suitability for your portfolio.
The following criteria could be important considerations when looking into specific opportunities, helping to determine the best investment option for your investment goals:
- Are you seeking a long term or short term investment? For how long are you willing and able to part with your capital?
- How well are you able to tolerate investment risk? Have you previously participated in investments of a similar nature?
- Do you have expertise in a certain investment field? Could you share your expertise to help with the potential success of the venture?
- How much are you willing and able to invest?
- What are your investment growth targets?
For experienced investors and high-net-worth individuals who are keen to explore investment options in the areas of venture capital, private equity and property – taking advantage of tax-efficient wrappers wherever possible – or simply understand how specific opportunities within these areas might look, the range of investment opportunities currently live on the GCV Invest platform could offer a useful insight.
GCV Invest is a private investor network for experienced investors, We specialise in providing investors with access to carefully selected alternative investment opportunities with the potential to deliver better returns than traditional investment products.
You can find out more about GCV Invest here.