Alternative Investments
For Entrepreneurs

Alternative Investments Overview

Quick Answer: Alternative investments for high-net-worth entrepreneurs include private equity funds, private credit, real estate syndications, hedge funds, infrastructure projects, and direct co-investments in private companies—asset classes offering 10-15% target returns with lower correlation to public stock markets. These investments typically require accredited investor status, minimum commitments of $50,000-$500,000, multi-year lock-up periods limiting liquidity, and sophisticated due diligence evaluating sponsor track records, fee structures, and legal terms.

Entrepreneurs benefit from alternatives through portfolio diversification beyond traditional stocks and bonds, access to institutional-quality investments previously unavailable to individuals, and exposure to cash-flowing assets that can complement business equity concentration while providing tax advantages through depreciation and capital gains treatment.

Richard's Return Gap Question

I sat across from Richard, a manufacturing entrepreneur with $8 million in liquid investment assets, as he asked a question I hear frequently:

"My portfolio returns 8-9% annually. That's fine, but I'm building a business that returns 25-40% on invested capital. The gap feels enormous. Are there investment opportunities that bridge this return differential?"

"Yes," I said. "But they require different thinking about liquidity, time horizons, and due diligence. The public stock market offers instant liquidity and daily pricing—conveniences you pay for through lower returns. Alternative investments sacrifice some liquidity and transparency in exchange for potentially higher returns and lower correlation to public markets."

"What kinds of alternatives are we talking about?"

"Private equity funds targeting 15-20% IRRs. Real estate syndications generating 12-18% returns through rental income and appreciation. Private credit providing 10-14% fixed yields. Infrastructure investments delivering 8-12% inflation-protected returns. Each has distinct risk-return profiles, time horizons, and minimum investment requirements."

Benefits and Risks of Alternative Investments

Primary Benefits

• Higher Return Potential: Target returns 10-20% vs. 7-10% for public markets
• Lower Correlation: Performance less tied to stock market volatility
• Institutional Access: Opportunities previously limited to endowments, pensions
• Tax Advantages: Depreciation, capital gains treatment, opportunity zones
• Cash Flow: Many alternatives provide quarterly or monthly distributions

Primary Risks

• Illiquidity: Multi-year lockups with no secondary market
• Higher Minimums: $50K-$500K per investment limits diversification
• Complexity: Sophisticated due diligence required
• Manager Risk: Performance highly dependent on sponsor quality
• Less Transparency: Quarterly vs. daily valuations
• Higher Fees: 1-2% management fees plus 15-20% performance fees typical

Allocation Framework for Entrepreneurs

Conservative Allocation: 10-20% alternatives (real estate, private credit focus)
Moderate Allocation: 20-40% alternatives (add private equity, diversified sponsors)
Aggressive Allocation: 40-60% alternatives (multiple PE funds, direct deals, infrastructure)

Richard allocated 30% of his $8M portfolio to alternatives: $1.2M in real estate syndications, $800K in private credit, $400K in private equity fund. This provided 3-4% yield advantage over public markets while maintaining 70% in liquid securities.