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Alternatives and Private Investing

Key Terms

Accredited Investor

For the purposes of private offerings restricted to qualified individual investors, this term refers to an individual who earns at least $200,000 per year ($300,000 for a couple) or who has a net worth of $1 million (not including a primary residence).

Alternative Investment

An alternative investment is a financial asset that does not fall into one of the traditional investment categories such as stocks and bonds. An investment, in turn, is a commitment of money or capital in hopes of gaining a financial return.

Appreciation

The increase in value of a financial asset.

Asset Allocation

Dividing investments among a mix of investment assets with the goal of optimizing returns

Asset Class

Investments or assets with similar features. Examples of asset classes are real estate, private equity, stocks, bonds, etc..

Cash Flow

Income generated from a productive business or real asset.

Correlation

The degree to which two investments or two investment classes move up and down simultaneously. Two asset classes that move up and down simultaneously are said to be correlated. Two asset classes that move in opposite directions with no relation to each other are said to be uncorrelated. Investors allocate their portfolios to alternative investments intending to achieve non-correlation to the more volatile stock market (i.e., broader markets).

Diversification

A strategy of allocating across a group of investments or asset classes in a portfolio that are dissimilar to each other in order to achieve a specific goal or combination of goals such as risk reduction, inflation hedge, income preservation, etc..

Dry Powder

Cash reserved for future investments. Savvy investors often hold onto money in order to quickly take advantage of private investment opportunities during volatile markets.

General Partner/Fund Manager

A general partner or fund manager, when associated with alternative investments, is the manager of a private investment fund. Alternative investment funds are commonly structured as general partnerships or limited liability companies, with investors acting as the limited partners (non-voting members in the case of LLC’s) and the fund as the general partner (managing member in the case of LLC’s)..

Hedging

Investing in an asset to counter the effects of one or more undesirable economic factors. For example, hedging against inflation refers to investing in an asset or class of assets expected to appreciate in value in an inflationary climate (i.e., of rising prices).

Investment strategy

A particular investment process is employed by an investor, general partner, fund manager, etc., in order to achieve a specific investment objective such as income, appreciation, capital preservation, tax benefits, etc. 

Leverage

Borrowed funds are used to acquire an investment asset.  

Liquidity

Liquidity refers to the ease and frequency at which investors are able to access or liquidate their investment capital. 

Passive Income

Income is derived from an investment in a productive business or real asset in which the investor is not actively involved.

Passive Investment

An equity or debt investment in a partnership in which the investor is not actively involved – leveraging the resources of a general partner/fund manager to manage the investment.

Preferred Return

In connection with a private equity/private company investment, a preferred return is the minimum return an investor must receive before any other profit distributions including profit distributions to a general partner/fund manager. Typical preferred returns can range from 6% to 10%.

Private Company

A company that is not publicly owned, quoted, or traded on a stock exchange. 

Private Debt

Debt offered to investors by private companies to raise capital to start, scale or diversify a business in exchange for fixed income returns.  

Private Equity/Private Investment

An ownership interest in a private company. Private equity is offered to investors by private companies to raise capital to start, scale or diversify a business in exchange for a percentage of the company’s profits. 

Tangible Assets

Physical assets having intrinsic value (value not dependent on market price) such as physical cash flowing businesses, real estate, oil & gas, agriculture, commodities and infrastructure.

Transparency 

The level of disclosure, access to financial reporting, and access to a general partner/fund manager in connection with private investment.

Venture Capital

A particular type of private equity where investors provide financing for startups and small businesses that are positioned for long-term growth with the hope of benefiting from that growth.

Volatility 

The frequency and degree of fluctuations in the performance of an investment – are often measured by standard deviation relative to a benchmark. High volatility is associated with higher risk, as unpredictable and wild price swings make it more challenging to anticipate project returns from an investment over time.