What are the 5 main types of alternative investment platform?
Alternative investments refer to asset classes other than equities, bonds and traditional cash investments. Private investors are increasingly accessing alternatives, ranging from private equity and property to cryptocurrency and collectables, resulting in a rising demand for online platforms to facilitate such investments. A number of different platform types exist for this purpose, including co-investment platforms, fund structures and online marketplaces.
Providing access to a range of alternative asset classes and possessing various advantages and risks, the following five examples are some of the most established platform types that experienced investors will come encounter:
Co-investment platforms usually source a number of opportunities and organise them in a single online location for investors to select from at their own will. This type of platform can cover a range of asset classes, including venture capital, private equity and property, and ultimately enable investors to share both the risks and rewards of investing into well-established assets and exciting endeavours.
Different co-investment platforms tend to target varying investor audiences, with some being aimed at experienced investors and high-net-worth individuals (HNWIs) and often also incorporating institutional investors into funding rounds, whilst others may provide opportunities for more everyday investors.
Whilst co-investment platforms can differ in the levels of due diligence undertaken and involvement in the opportunities they provide investors with, more sophisticated co-investment platforms tend to employ a defined set of internal processes and benchmarks to qualify opportunities, often focusing on growth potential and investor suitability.
For investors that want full control over where their capital is invested, but still seek reputable opportunities vetted by investment professionals, co-investment platforms can prove an effective route.
- Dan Smith, Investor Relations Director, GCV
Co-investment platforms have grown in popularity over the past decade, with approximately 24% of global investors utilising co-investment within their portfolios in 2012, almost tripling to 71% in 2021, as highlighted by the World Economic Forum.
When accessed via reputable providers, co-investments can enable investors to access highly vetted opportunities with the potential to achieve considerable financial returns. The due diligence process undertaken by the co-investment provider can help to mitigate the risks associated with the investment, as well as improve its potential for growth due to the involvement of experienced investment professionals.
Furthermore, the involvement and expertise of co-investment platform teams is often available without the requisite of additional fees, unlike funds, for example, which can charge premiums for the research and selection of a group of investment opportunities on the behalf of investors. Depending upon the provider, investors may be charged a reduced fee, or no fee at all, to access opportunities via a co-investment platform.
Sophisticated online co-investment platforms can offer investors one convenient location to research and invest into opportunities and monitor their investment portfolio. This grouping of multiple opportunities, potentially across multiple asset classes, could also allow experienced investors to more straightforwardly diversify their portfolio.
Additionally, co-investing can allow investors to establish and develop relationships with senior industry professionals, and vice versa. Improved relationships, as well as the sharing of investment risks and returns, can provide a mutually beneficial scenario for all parties involved in the transaction.
Whilst a range of attractive investor benefits can be associated with co-investment opportunities, these are understandably accompanied by a number of risks.
For example, when compared with other routes, co-investment opportunities can sometimes prove to be more complex in their structure (due to the involvement of a number of parties), and thus the increased potential for breakdowns in communication and inefficient processes. Subsequently, clear communication and documentation of investment processes are ultimately crucial in ensuring the co-investment runs smoothly.
Equally, although co-investment opportunities can display potential to strengthen investor relationships, poor selection, execution or performance of an opportunity can conversely result in strained relationships between the parties involved and a mutually negative outcome. In turn, conducting adequate due diligence into reputable co-investment platforms with proven track records should be a key priority for any investor considering this route.
Enabling investors to simultaneously access a number of financial products, an investment fund is a pool of capital that a group of investors contribute to, from which a fund manager allocates this pooled capital to a range of opportunities or assets on their behalf.
Typically, the fund manager will oversee the investors’ capital allocation, deciding which opportunities are selected, in what quantities, and at which point assets should be bought and sold. Investors tend to have little input within this process, so those seeking a minimal-involvement, less research-intensive route may find funds appealing.
Investors will typically choose to invest into a fund based on asset class, goals, risk level and fee structure, to ensure that the opportunity aligns with personal investment values.
Examples of funds:
- A hedge fund is an actively managed fund, often favoured by accredited investors. As a result, hedge funds tend to invest in riskier assets, in addition to stocks and bonds. These riskier assets can include derivatives, such as futures and options.
- Private equity funds are closed-end funds that are not listed on public exchanges. In general, PE funds have a 10-year duration, often charging approximately 2% annual management fees and 20% performance fees.
- Venture capital trusts (VCTs) are tax-efficient closed-end funds, designed to provide venture capital to early-stage businesses and target considerable returns for UK investors. A form of publicly traded private equity, VCTs distribute investor capital to a portfolio of eligible companies whose performance then dictates share value.
Arguably, the main advantage offered by funds is the expertise of a specialist fund manager allocating investors’ capital into different opportunities, often resulting in an inherently diverse investment and mitigating the risk of portfolio concentration.
Furthermore, investors can usually access investments conveniently, via a single instrument and, sometimes, certain funds can offer comparatively lower fees to assist investors in targeting high returns.
Another important consideration for investors is regarding liquidity. Funds can often reduce the time taken and the cost of converting an investment back into cash due to the possibility of secondary market trading (although for some fund types, such as VCTs, demand within such secondary markets can be limited).
Additionally, the potential for superior returns can exist with investment funds, particularly venture capital funds, as earlier stage investments can present increased growth potential and higher risk/return profiles.
Although not offering as generous reliefs or targeting as considerable growth as other UK venture capital schemes, such as the EIS and SEIS, investors have the potential to benefit from a number of tax reliefs when investing into venture capital trusts. These benefits include up to 30% income tax relief, tax-free dividends and an exemption from capital gains tax (CGT).
Additionally, investing into a VCT could provide investors with the opportunity to help innovative small companies grow, subsequently creating jobs and encouraging economic growth, both on a targeted regional level and a wider national level.
Some of the main risks associated with investing into funds involve the fact that individual investors have no control over specific investments, which could potentially result in misalignment between investor values and the allocation of their capital.
Also, it is possible for investment funds to charge high, unjustified fees that can rapidly reduce profitability for investors.
Additionally, it is important to understand that smaller companies can carry a comparatively high level of risk, especially during their early years, and some will not be successful. This means that venture capital funds, in particular, are likely to involve elevated levels of risk.
Furthermore, specifically relating to VCTs, regulations currently state that investors are required to hold shares for a minimum of five years to fully benefit from the available tax reliefs, meaning that investors should be willing and able to part with their capital for a specified number of years before any potential returns are realised.
An online marketplace, or online auction, is an e-commerce website built to connect sellers with buyers. Within the alternatives space, this platform type is often used for collectables, including art, fine wine and, more recently, virtual collectables such as non-fungible tokens (NFTs).
Investors who have an interest or sufficient level of experience in trading certain collectables will often decide to diversify their portfolio by expanding into this asset class and will likely use online marketplaces in some form as a way of doing so. In addition to potential diversification benefits, collectables have the potential to target considerable returns, though can be particularly difficult to source and sell at a profit without background knowledge.
For example, returns on investment-grade wine have outperformed the Global Equity Index by 1.88%, with an average annual return of 10.6% over the past 15 years. This outperformance is largely driven by scarcity, as investment-grade wines contribute to only approximately 0.1% of the world’s total wine production, and prices of individual bottles can further rise over time due to the wine’s quality improving with age.
The growth in popularity of collectables, such as wine, and the introduction of digital collectables, such as NFTs, has led to an increase in the availability and popularity of online marketplaces to facilitate investment into collectable alternative assets.
With the asset classes commonly accessed via online marketplaces, such as collectables, often not requiring minimum hold times or account balances, investing into this area can be more widely accessible for a range of investors when compared to more exclusive alternative investment channels such as angel investor networks, for example.
Additionally, real time collectables trading can function similarly to major stock markets, enabling investors to buy and sell assets at their true market value, with assets sold via such platforms having the potential to be considerably more liquid (though market demand can also dictate this).
Furthermore, online marketplaces can provide investors with access to global products that may not have been available in many traditional collectable trading settings, such as in-person auctions.
On the other hand, online marketplaces could pose significant risks, especially to new or relatively inexperienced investors.
Firstly, some online marketplaces may provide a lack of (or inaccurate) product information, further elevating investment risk, as investing in collectables can already require sufficient knowledge regarding the individual items and the trends and nature of the market.
Moreover, levels of regulation within niche online marketplaces can prove to be relatively limited. Again, this could further enhance the risk for investors as the process could become less transparent and secure.
The notable risk of reduced liquidity also exists when investing via an online marketplace. As some collectables may be more highly specialised and less mainstream, it could be difficult to find a buyer if holders of a collectable decide to sell their asset.
A trading platform is a software system offered by financial institutions (such as brokerages and banks) and used by investors. With such platforms and apps, investors can easily place trades and monitor their market positions.
Most often, trading platforms offer additional features designed to help investors make well-informed investment decisions. These can include real-time quotes, interactive charts, live news feeds and access to premium research and educational resources. Some platforms can also be tailored to specific markets.
Following the Covid-19 pandemic, investment trading platforms have experienced a strong surge in popularity, with over 130 million investors using trading apps in 2021 globally, a 49% increase from 2020.
One potential benefit associated with online trading could be the potential for comparatively lower investment fees when compared with other alternative investment platforms, such as funds. Relatively lower fees could allow investors to invest via trading platforms with greater personal freedom, in a way that maximises potential profit margins by minimising any additional fees.
As trading stocks can be time-sensitive, online trading platforms allow investors to execute trades almost instantly, allowing investors to take advantage of time-dependent, favourable market conditions.
Furthermore, trading platforms tend to provide investors with considerable liquidity, an attractive point for investors looking for short-term investment opportunities. Although, this does depend on the specific assets being traded, as some more popular assets tend to gain more demand and easier prospects for selling than others.
Whilst attractive fee structures (or a lack thereof) can sometimes be offered by trading platforms, low fees may not always be advantageous should they translate to fewer or less powerful features. In some cases, this can make reputable co-investment platforms the preferred option - providing expertise, support and structure for investors seeking equity investments, free of additional fees.
As well as this, investors should carefully consider the financial institution’s reputation before committing to a specific trading platform. This can help to avoid organisations with conflicting interests and high fees that do not translate to any additional value.
Importantly, assets typically exchanged via trading platforms (such as equities and crypto assets) can be highly volatile - shifts in market value, external events and the overall economic climate can lead to prices falling rapidly, potentially resulting in significant capital losses.
Although not necessarily a type of platform, direct investment represents another route for investors to access alternative assets.
Direct investment involves investing into an opportunity directly at the source, without any intermediaries. This method is most frequently utilised by experienced investors with a strong background in the relevant investment field.
Often, companies pitching funding rounds may approach sophisticated investors or angel networks to promote a direct investment opportunity, and so this type of approach is unlikely to be available for less experienced investors.
If an investor decides to support a company or project directly, this route allows complete control to be exercised regarding which specific opportunities are accessed, at which time, how frequently, and the amount of capital allocated. This can be highly beneficial for experienced investors who have a clear idea of an opportunity in which they seek to invest, and an outlined investment strategy which they seek to fulfil.
Additionally, as a financial intermediary is not being used to facilitate the investment, this approach could be more beneficial for both investors and the organisation receiving the investment because no fees are charged by a broker, potentially improving the profitability of the company, project or asset and, in turn, the investment.
The main risks of directly investing into an alternative asset could primarily relate to a concentration of capital and risk, as only one company, sector and geography are likely to be accessed via this route.
Additionally, a lack of involvement from a professional intermediary that carefully researches and selects investment opportunities to ensure certain criteria are satisfied could potentially mean that issues within the business, project or asset may initially go unnoticed by the investor. As a result, the anticipated growth potential and financial returns associated with the opportunity may not be fully realised, or not materialise at all.
Key investor considerations for alternative asset classes
Utilising investment platforms to access a range of alternative asset classes can provide significant benefits for investors, but these are also accompanied with some risks that must be noted.
Alternative asset classes are generally uncorrelated to public market movements, and so can often contribute towards a more well-diversified investment portfolio, working to minimise the overall level of portfolio risk.
Furthermore, unique points of diversification could be accessed through alternative asset classes, such as investing into early-stage businesses via venture capital and increasing the range of company maturity levels held within an investment portfolio. Whilst investing into young businesses can provide investors with diversification benefits, opportunities within this alternative asset class can naturally pose higher levels of risk due to a lack of trading history, for example.
Many alternative investment opportunities can require holding periods of several years and may not provide the opportunity to sell through active exchange markets, unlike most traditional investment types. This means that investors may need to be prepared to experience a lack of liquidity. However, to compensate for reduced liquidity, many alternative asset classes offer investors superior target returns.
This can be of particular importance to investors during times of rising inflation, when the likelihood of portfolio value becoming quickly eroded is often elevated, and superior, inflation-beating returns are required to continue growing wealth.
As with all investments, the risk of losing capital is present when investing into alternatives via online platforms. However, this risk can be mitigated, to some extent, by utilising generous tax wrappers on eligible investments.
For instance, venture capital and private equity investments into certain qualifying UK businesses can provide investors with a wealth of tax benefits via the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS), including up to 50% income tax relief, 100% inheritance tax relief and 100% capital gains tax (CGT) relief, amongst other advantages.
Furthermore, should a loss occur on an EIS- or SEIS-eligible investment, investors can offset the value of this loss against their income tax bill or CGT bill. Ultimately, the combination of reliefs offered by these schemes can help to minimise the overall risk of investing in alternatives whilst working to maximise potential gains for investors.
Overall, investment value can fall as well as rise, and so sufficient ability to cope with any financial losses must be displayed by investors, regardless of any tax benefits available. Investments should be inherently appealing, and not made primarily for the potential to benefit from tax wrappers.
The alternatives market tends to be less regulated than traditional markets, meaning that investors could potentially exercise more financial freedom.
Although, this does warrant that more thorough due diligence, and possibly higher levels of investor expertise in certain asset classes, is required.
Some alternative asset classes, namely venture capital, private equity and property, can provide investors with the ability to generate considerable positive impact for society, the economy, and the environment - a factor of increasing importance to twenty-first century investors, many of whom are seeking more than solely generating positive financial returns.
A growing opportunity for investors
Following the growth in popularity, utility and accessibility of alternative investments in recent years - accelerated by increasingly volatile global equity markets and the fast-tracked digitisation of services following the Covid-19 pandemic - the rise of online alternative investment platforms has opened up an entire new domain for private investors.
This is evidenced by the fact that, today, investors are able to buy wine futures, gold investments and shares in startup companies via online alternative investment platforms, helping these transactions become more straightforward than ever before.
Although investing in alternative asset classes through online platforms can involve notable risks, the broad range of platforms available to UK investors can offer the opportunity to diversify investment portfolios, maximise returns and minimise risk more effectively than ever before.