The exponential growth of alternative investments is hard to ignore—Preqin reports that AUM in this category should skyrocket to $23.21 trillion by 2026, an increase of 74% from 2021 ($13.32 trillion). The alternative investment market’s growth is fueled by savvy accredited investors’ view of it as a newly accessible frontier and exciting opportunity to diversify portfolios and potentially achieve higher returns.
Read more to learn why alternatives can be an attractive part of your investment portfolio—and why private real estate opportunities are the ideal choice.
Unlike traditional investments such as stocks and bonds, “alternatives” is comprised of a variety of asset classes, and, according to Forbes, these assets can provide better valuations and higher growth. “Alternative assets provide the opportunity to invest in companies based on private company valuations which are typically much lower than comparable public companies due to the inherent lack of liquidity.
“In terms of revenues, earnings and value creation, investing in alternative assets that are experiencing rapid growth is more compelling than investing in more mature, publicly traded companies with lower growth prospects.” Ultimately, the portfolio exposure to alternatives can provide savvy accredited investors an attractive wealth-building solution.
Blackstone argues that “unlike equities or fixed income, real estate is both income-oriented and capital appreciation-oriented,” which is part of the reason why real estate is the third-largest alternatives asset class. Fund managers are cognizant of this too, so they are adjusting their portfolios accordingly. A 2022 EY report highlights that 17% of alternative fund managers either currently offered real estate investments (13%) or were planning to offer these opportunities (4%).
(Image courtesy of EY)
This, of course, makes sense for sophisticated investors because alternatives like real estate create a diverse portfolio, which the SEC recommends to help investors protect against significant losses. “By investing in more than one asset category, you will reduce the risk that you will lose money and your portfolio’s overall investment returns will have a smoother ride.” A diverse portfolio that includes alternatives can help provide this smoother ride, and real estate in particular offers risk-adjusted returns with 56 percent lower volatility than equities over the last 20 years, according to Blackstone.
Beyond wealth protection through diversification, one of the main reasons accredited investors should consider private real estate is the potential for higher returns, just like alternatives as a whole. Private real estate often can outperform traditional investments over the long term. Since these assets do not fluctuate with the stock market, they can perform well during traditional market downturns. For example, Blackstone says, “Private real estate income has generally increased faster than inflation,” even in 2021-2022.
This is critical to note, as GoBankingRates noted 90% of Americans do not invest in real estate during an economic downturn. There are opportunistic private real estate investments accredited investors are not taking advantage of due to economic uncertainty, which causes them to miss out on investments at attractive, often distressed, valuations.
The benefits of real estate investments do not end there, though, according to Forbes. “Real estate can generate income for investors while leveraging capital and providing income tax benefits...Certain alternative assets, such as rental real estate, can generate a reliable income stream over time with a higher yield than dividends or interest payments.”
In summary, real estate investments can provide investors with the potential for higher returns, regular cash flow, passive income, long-term appreciation, a hedge against inflation, tax efficiency, diversification, and low correlation with traditional asset classes. Real estate investments also enable investors the ability to tailor opportunities to their wealth goals.
What you are trying to achieve with your portfolio will influence what real estate investment opportunities you choose. Remember, JLAM is not an accounting or tax firm, etc, so please speak to the appropriate professional before you make any financial decision. Having said this, there are several wealth goals you need to keep in mind when you are choosing a hand-picked, carefully curated investment opportunity:
Blackstone’s data suggests that income from private real estate has been consistently high over the last 20 years, with distributions four percent and above for 17 out of the 20 years. This reinforces why partnering with JLAM presents such an attractive investment opportunity. Since 2011, we’ve deployed more than $400 million in capital and developed more than 2,500 lots and 1+ million square feet of commercial. Through this, our completed projects have delivered an average Net IRR over 19% and an average 1.9x Net Multiple.*
In addition, our high transparency and fee-light structure provide an efficient investment experience for you. Throughout the investment, you have direct access to the people who manage your money and run the investments, so it is very much a personal relationship.
Since we firmly believe in aligning our interests with our partners—we contribute a significant amount of our own money into every partnership—our funds are treated just like yours, ensuring every decision we make is in the best interest of the investment. Our primary compensation comes on the back end of our investments, once we have achieved certain performance hurdles for our investors, and our performance fee (also known as carried interest) takes effect. (To learn more about our deal structure, read our blog How Our Private Real Estate Investments are Structured.)
If you are interested in learning more about investing in alternatives—specifically private real estate opportunities—schedule an appointment to speak with one of our managing principals, Doug Motley.
*All investments involve the risk of potential investment losses as well as the potential for investment gains. Prior performance is no guarantee of future results, and there can be no assurance, and clients should not assume, that future performance will be comparable to past performance. Metrics updated as of June 30, 2023. JLAM does not provide tax, legal, investment, or accounting advice. This website has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, investment, or accounting advice. You should consult your own tax, legal, investment, and accounting advisors before engaging in any transaction. Any third-party information contained herein is from sources believed to be reliable, but which we have not independently verified.
