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The popularity of alternative investments has increased notably in recent years. Whether that's due to disillusionment with the equities market or a desire for capital to work harder, investors are allocating billions into alternative asset classes each year. For example, the value of venture capital financing alone in the UK in Q1 2022 totalled over $9 billion, up from $2.5 billion in Q1 2018, according to a survey by KPMG and PitchBook.
Investors are becoming increasingly keen to allocate capital to alternatives, given their comparative resilience during times of external volatility. In turn, given the vast range of alternative opportunities available to UK investors, it can help to first review a number of asset classes in some depth before parting with capital, assessing how each investment could work to overcome the hurdles the current economic climate poses to Britain’s investors.
Whilst largely dependent upon individual investment goals and circumstances, research suggests that the UK’s most effective alternative investments in 2024 may fall under the following asset classes:
- Private equity
- Venture capital
- Property
- Peer-to-peer lending
- Private debt
- Collectables
- Commodities
- Infrastructure
- Structured products
Whilst these routes constitute some of the most attractive alternative investment opportunities available in the UK, as an investor it is crucial to understand each asset class in more depth to judge whether it has the potential to add value to your portfolio.
Firstly, it is important to be familiar with exactly what alternative investments are.
The term essentially refers to financial assets that do not fall into conventional investment categories, such as equities, bonds, and cash investments.
Alternative investments often display the characteristics of having low correlation with traditional markets (making them an appealing portfolio diversifier), the ability to act as an effective hedge against inflation, being subject to reduced regulation, and holding potential to yield superior returns.
By 2025, PwC forecasts that $21.1 trillion will be allocated to alternative asset classes. Furthermore, according to KKR, families that hold over $1 billion in assets under management have ‘from 51-54% of their total assets in some type of alternative product’. Through the lens of high-net-worth individuals, this popularity is mirrored, with the same study by KKR finding that high-net-worth investors allocated approximately 26% of their assets to alternative investments in 2020, up from 22% in 2017.
Alternative Assets vs. Traditional Assets
Ultimately, when comparing alternatives with traditional asset classes, it should be noted that four of the main differences lie in the following areas:
- Alternative investments can be largely illiquid whilst traditional assets tend to be fairly liquid.
- Alternatives are generally uncorrelated to public markets, whilst traditional asset classes are highly correlated to market movements.
- Alternative asset classes can be more effective portfolio diversifiers than traditional asset classes.
- The alternatives market tends to be less regulated than traditional markets, meaning that investors can have more financial freedom. Although, this does warrant that more thorough due diligence and possibly expertise in certain asset classes is required.
Taking the above points into consideration, some of the UK’s best alternative asset classes available in 2024 are now explored individually, in greater detail:
Private Equity
Private equity (PE) involves investing into mature companies that are not publicly traded on a stock exchange, acting as a source of finance for private businesses, generally for a long time period.
Often, the goal of PE investment for the recipient company is to boost growth or revamp the business. Further goals usually revolve around mergers, being acquired by a successful firm or going public. For the investor, PE is a great option to expand into the field of alternatives and effectively diversify portfolios.
It may have been expected that recent events, including the Brexit vote, Covid-19 pandemic, Ukrainian crisis and cost-of-living crisis would deter some private equity activity due to growing uncertainty. However, there was only a short-lived slump in the volume of PE deals during mid-2020. The market has recovered significantly quickly, with 2021 experiencing the highest level of merger and acquisition deal activity in recent years, with a total annual value of $1.2 trillion in 2021, 50% higher than the previous record.
Furthermore, this asset class offers potential for strong long-term returns. Some PE investments offer regular dividends, potentially acting as a more stable form of supplementary income during uncertain economic times.
Venture Capital
Venture capital (VC) involves investing into early-stage businesses, typically with high-growth potential. Ambitious startups can form some of the most exciting alternative investment opportunities to back, as many young businesses display the potential to positively transform industries and communities.
This could be identified as one of the best alternative investments to consider in 2024, particularly in the UK, as VC is often eligible to benefit from tax-efficient wrappers, such as the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS).
Numerous gains can be derived from these tax wrappers, including up to 50% income tax relief on a maximum of £100,000 a year, inheritance tax and capital gains tax exemptions, risk minimisation with loss relief and, perhaps most significantly, the opportunity to invest in some of the UK’s most transformational, impact-driven startups and scaleups.
The growing focus on environmental, social and corporate governance (ESG) goals is a key factor to consider when investing in venture capital. Transformative startups often have the potential to meet ESG goals and pave the way for new ideas and methods of doing business. What’s more, EIS investments offer enhanced eligibility criteria and maximum investor allowances (double the annual £1 million limit) for investments into knowledge intensive companies (KICs), furthering the scheme’s potential to generate long term positive impact.
Alongside the considerable growth potential available to investors under VC schemes, the aforementioned are just a handful of reasons why, in 2024, venture capital can be one of the most effective alternative investments available. Particularly when supporting innovative early-stage businesses that display positive attitudes towards meeting the social and environmental goals of the twenty-first century, investors can be rewarded with the knowledge that they are facilitating wider positive change, as well as strong financial returns.
Property
Property is one of the oldest forms of investment available and has been popular for centuries, so why is it particularly attractive in 2024?
It is anticipated that wider socio-economic movements are set to further boost the attractiveness of property investments in 2024. Highlighted by global investment bank, JPMorgan Chase, property investments in the near future are likely to benefit from changing trends in how people work, socialise, and shop - largely fuelled by the Covid-19 pandemic.
Growing at the fastest annual rate since 2004, average house prices in the UK reached a record high of £294,845 in June 2022. These rising house prices could signal an ideal time for investors to expand into the alternative asset class of property.
Particularly due to its essential nature, the residential housing market has long displayed the characteristic of being able to withstand periods of market turbulence more effectively than many other assets.
A more ‘hands-off’ approach to investing into residential property is via joint venture (JV) property investments. This variation of property investment involves an arrangement between two or more parties, where value is created from the development, acquisition or management of a property. Subsequently, experienced investors and property developers can combine capital with industry expertise to deliver highly-demanded property projects, directly addressing the UK housing crisis, and ultimately sharing in the profits.
In the past, joint venture investments were usually only available to institutional and corporate investors due to their large scale and, therefore, comparatively large capital requirements.
However, technology has since transformed the JV property investment market.
Now, for experienced private investors, joint venture property investments can be accessed easily via specialist partners and online platforms. This form of alternative investment can be highly attractive if approached and executed with the right team, as JV investing displays the potential to deliver more considerable returns in a more minimally involved manner for investors than many traditional property investment routes, such as buy-to-let.
Peer-to-Peer Lending
Originating in 2005 and gaining momentum in 2008, peer-to-peer (P2P) lending is a form of direct lending to individuals or businesses, most often completed via online platforms that match lenders with borrowers and is regulated by the Financial Conduct Authority (FCA). For example, business owners can connect directly to individual investors who are willing and able to lend capital to them.
This may be one of the best alternative asset classes investors are able to incorporate into their portfolio in 2024, as P2P lending can enable investors to access higher target interest rates than many traditional routes, such as government bonds (which often target below 4% APR).
With interest rates rising in many countries, specifically the UK Bank of England base rate reaching 1.75% in August 2022, the rewards for saving appear to be increasing slightly. But when compared with the disproportionate growth in inflation that saw the UK CPI hit 10.1% in September, the comparatively minute growth in interest can be seen as damage limitation rather than a viable saving option. Despite the rise in interest rates, the returns achievable from P2P lending still often exceed today’s growing saving returns.
Furthermore, rising rates suggest that demand from businesses and individuals for P2P lending may increase in 2024, as bank loans may become less viable. Higher demand could signal more lending opportunities for investors who are willing to expand into this alternative asset class, and higher tax savings for those taking advantage of P2P loans via tax-efficient investment routes such as the Innovative Finance ISA (IFISA).
Private Debt
Private debt refers to any debt held by private companies and/or individuals. For instance, a private company takes out a business loan or an entrepreneur borrows money from a family member; these are both examples of private debt.
One of the most prominent forms of private debt involves alternative financial institutions offering loans to private companies. These institutions are classed as ‘alternative’, in the sense that they are not mainstream banks. Typical examples of figures who may issue these private loans are institutional investors or wealthy individuals.
This term is sometimes confused with the aforementioned private equity (PE). However, those offering private debt do not gain ownership of the businesses into which they invest, unlike private equity. Furthermore, private debt funds can act more flexibly since they are often open-ended, whilst private equity funds tend to display a closed-ended, limited lifespan.
To compare further, private equity aims to generate returns by increasing the value of the company, whereas private debt achieves returns via interest rates earned on the loan. Thus, private debt may be more appealing to investors who are seeking a less directly involved approach.
In 2022, private debt could become an even more attractive alternative investment. This asset class has emerged from the Covid-19 pandemic with credentials in better shape than ever. Privately held investment data company, Preqin, forecasts private debt to grow by approximately 11.4% per annum between 2022 and 2025. The overall growth in private debt is largely being driven by expansion in both distressed debt and direct lending strategies.
Overall, with high inflation and volatility in public markets today, many alternative assets, including private debt, are enjoying a further surge in popularity. The three main reasons investors often choose to back private debt include risk reduction, asset diversification and increased access to traditionally difficult-to-reach opportunities.
Private debt has proven to be a source of sustainable income for investors, despite ongoing economic turbulence. Many private credit funds are backed by floating-rate securities, meaning that investors are more secured against rising interest rates. Also, private debt provides access to markets which would otherwise be completely inaccessible to investors, for instance, private infrastructure debt, which can further enhance portfolio diversification.
Collectables
This alternative asset class essentially includes items that hold value due to either popularity or rarity. Collectables can be an interesting area for investors to expand into, particularly if a strong interest or understanding regarding a specific item is displayed, for example, in fine art, classic cars, wine, rare whisky, handbags, watches or even, more recently, virtual collectibles such as NFTs (non-fungible tokens).
Most often, luxury goods and other collectables don't constitute very notable portions of the alternative asset holdings of many wealthy individuals. However, it is interesting to learn that the average value of luxury goods has grown by 129% over the past 10 years, as measured by the Knight Frank Luxury Investment Index. Specifically, rare whisky has experienced major value growth over that same decade, with an approximate 478% value increase.
Despite this rapid value growth, Covid-19 threw a slight curveball at the collectables market in 2020, with the value of many items depreciating following fewer in-person auctions and limited supply options.
Overall, collectables do have potential to add significant value to some already well-diversified portfolios. However, these asset classes are likely to be most suitable for investors who have a keen interest or detailed expertise regarding certain collector's items, and who display sufficient ability to cover transport, storage and maintenance costs, for example.
Commodities
Often less well understood by the average investor, commodities can be a complex alternative asset to allocate capital into. This form of investment can involve energy resources, such as oil and natural gas, and agricultural products, such as wheat and corn. Commodities are bought and sold in bulk on exchanges, in a similar way to equities. The largest exchanges include the London Metal Exchange (LME), the Chicago Mercantile Exchange (CME) and the New York Mercantile Exchange (NYMEX).
One important point to note is that, as inflation rates rise, historical data suggests that commodities can act as a useful portfolio diversifier, essentially hedging against inflation and thus working to protect the value of investor portfolios.
In 2024, commodities may be one of the best alternative investments to consider, as the S&P Goldman Sachs Commodity Index (SPGSCI) has been up almost 40% YTD, while the traditional S&P 500 (SPX) has been down by 15%.
Moreover, inflation in the UK reached 10.1% in July 2022. This suggests that commodity investments could become increasingly beneficial to investors looking to inflation-proof portfolios. Ultimately, as commodity prices are primarily determined by the market forces of supply and demand, the current economic situation suggests that prices of many commodities are set to remain high or potentially rise further, as limited supply aims to satisfy constant demand.
Infrastructure
In the twenty-first century, investors are increasingly focusing on the scope for generating positive impact, as well as improving financial returns (the UK alone registering a record £2 billion of investment into impact startups in 2021). In many instances, sustainable infrastructure projects can provide investors with the opportunity to facilitate positive social and environmental change alongside desired financial results.
For example, investing in renewable energy infrastructure projects is likely to be an attractive investment opportunity in 2024. According to the International Energy Outlook, in 2050, global demand for natural resources is expected to exceed the earth’s total capacity by more than 400%. Transitioning to renewable energy is a crucial part of the solution.
A further attractive component of infrastructure investment is that the cost of renewable energy sources is now lower than the cost of fossil fuels in most parts of the world, according to Lazard’s Levelized Cost of Energy Analysis 12.0. This indicates that sustainable infrastructure investment opportunities can yield higher returns and also actually cost less to facilitate than less sustainable substitutes.
Structured Products
Also known as market-linked investments, these are pre-packaged products based on the value of another financial instrument, generally providing retail investors with efficient access to derivatives.
The ability of structured products to offer customised exposure to typically difficult-to-reach asset classes and subclasses can make this alternative investment a useful complement to a well-diversified portfolio.
Particularly in 2024, this asset class could be important for investors to consider, as S&P Global Ratings forecasts a record year of growth, taking global structured finance issuance in 2022 to $1.56 trillion, following a 43% year-over-year increase from 2021.
The Bottom Line
Overall, when researching and selecting the most appropriate alternative investments to incorporate into your portfolio in 2024, it is crucial to consider the benefits and drawbacks alternative investments have the potential to generate as a whole, alongside individual asset classes in depth.
From portfolio diversification to lower portfolio volatility, scope for superior returns, the opportunity to invest for impact, and the opportunity to benefit from significant tax wrappers, including the EIS and SEIS in the UK, it is clear the scope for benefit alternative investments can provide cannot be understated.
On the other hand, investors should consider that, due to the more complex nature of alternative investments, higher risk levels can often be faced. For example, investors are likely to require tolerance for reduced liquidity, the ability to invest higher initial capital sums, understanding of complex regulation and, as with all investments, the ability to put capital at risk. Therefore, many alternative asset classes can be better suited to experienced investors.
Ultimately, there is no doubt alternative investing is gaining significant interest as an increasing number of experienced investors seek to effectively diversify their portfolios in 2024 in the midst of a turbulent economic landscape. Though a multitude of external factors need to be considered, after completing thorough due diligence, it is likely to become apparent whether alternative investment opportunities are right for you and, if so, which types could best complement your portfolio.
GCV Invest is an online private investment platform for experienced UK-based investors. We provide access to carefully selected investment opportunities across three asset classes; venture capital, private equity and property. Our investor members have co-invested over £35 million alongside institutional investors in transactions worth over £100 million.
With a portfolio worth over £600 million and over 600 high-quality jobs created, our investor members are building wealth with impact. You can find out more about GCV Invest here
