Interested in what assets make up the portfolio of institutional investors?
While you may think of it as some great secret, there is one central truth we all know -- it’s not all traditional publicly-traded stocks and bonds. In fact, most institutional investors have placed 25 to 50 percent of their funds in alternative assets.
Investment professionals from various disciplines are quickly coming to recognize the importance of investing in alternatives as institutional investors, family offices and university endowments are decreasing their public market commitments and increasing their capital allocations across private equity, venture capital, and real estate.
The Yale endowment is a stunning example of this. In 1987, 90 percent of their endowment was in publicly traded assets. As of 2018, 50 percent were in alternative investments and experienced 12% yearly returns on average (the jury is still out on the impact of COVID-19).
Family offices such as Omidyar Network and Bezos Expeditions are making more and more investments into startups, compared to traditional investments. They are seeing the value in the returns from startups and are willing to take that risk. In fact, in the past few years, family office deal volume outpaced traditional venture capital firms, according to Crunchbase.
This shift in investment practice is due to several fundamental changes in the investment landscape. First and foremost, fewer companies are going public, which reduces the likelihood of catching a unicorn in the public market. In the 1990’s there were more than 8,000 publicly traded companies, a number that dropped to approximately 3500 by 2017. Further, a recent study showed that since the 1920s, only four percent of all companies generated the U.S. stock market’s total ten percent average annual return.
At the same time, as access to venture capital has become more readily available, companies have opted to stay private for longer into their maturation cycle, shifting profits to the private markets.
Because of the infusion of venture capital, many companies are achieving the majority of their growth while still being privately held. This limits the potential return for investors who only make equity investments in companies on the public market, when growth has already begun to plateau. This has caused many investors and high-net worth individuals to view privately held companies as the most compelling investment targets.
Self-directed IRAs offer the opportunity to diversify a retirement portfolio into alternative assets with holdings other than the mutual funds, stocks and bonds that comprise most IRAs and 401(k)s. These alternative investments can include venture capital, private equity, real estate, digital assets, and other investments--and you don’t necessarily need a family office to invest. While some alternative investments can be higher-risk securities, often due to their illiquidity characteristics, these opportunities offer diversification and returns in many cases beyond traditional holdings.
Many people consider their IRA to be an untouchable pool of capital. There is often a risk-averse mentality that surrounds retirement funds. This often causes even sophisticated investors to believe their IRAs are best served sitting in publicly traded assets, split between stocks and bonds and letting compound interest work its magic.
The truth is, for most people, IRAs make up a huge proportion of their savings. Retirement assets are around $30 trillion. With this in mind, there is an opportunity for responsible investing in alternative investments for a truly diverse portfolio that affords the opportunity for both current interest earning assets, like real estate, and tax-advantaged treatment of current income and capital gains from investments.
Until recent years, the opportunity to invest in these privately held companies had been limited to institutional investors, like Yale, and ultra high net worth individuals like Elon Musk and Peter Thiel – who is also famous for using his Roth IRA savings to invest in Facebook and generate a tax-free return of nearly $1 billion!.
With the passing of Regulation CF in 2016, this is no longer the case. Regulation CF is the set of rules governing equity crowdfunding and allowing people outside of venture capital to invest in early stage companies, as well as other alternative investment opportunities.
At Alto, knowledgeable investors can access and use their IRA savings through a self-directed IRA to invest in alternative assets like venture capital and private equity, as well as income generating assets like real estate and debt. Main street investors using Alto are now diversifying their retirement savings by allocating a portion of their IRAs in alternatives the same way institutional players like the Yale endowment have been doing for decades.
Individual investors have the option of using their AltoIRA to invest in opportunities they have found on their own, or deals sourced by crowdfunding platforms such as AngelList, Wefunder and Republic for early-stage company investments, EquityMultiple for real estate deals, or EquityZen for secondary purchases of pre-IPO company shares. Others include Diversyfund (for real estate), Rally (for cars and other collectibles), and Masterworks (for artwork). While the investment opportunities on these platforms are vetted and deal terms are transparent, investors should always do their own due diligence when considering an investment..
All investing involves risk and investors need to evaluate their risk-tolerance and objectives before investing in alternatives and public securities alike. That said, both investors and investment data agree that a diversified portfolio is not only the best way to mitigate risk but also a tried-and true method for producing the strongest returns. With such a large percentage of savings in the U.S. held in IRA accounts, the allocation profile of these assets should more closely mirror the investment best practices employed by institutional investors, family offices and investment professionals.
At AltoIRA, we’re on a mission to help people use their savings to invest in what they choose, educate everyone on their investment options, offer tools that are easy to use and access, and provide transparency throughout the process. Alto represents a new standard of what your IRA should be in today’s society.
To start investing in alternative assets with your IRA, open an account at Alto and get started.
Alto had its first Covid period board meeting last week. Like many companies, we considered our strategy in light of the new world order.Our strategy -- to provide affordable access to alternative investment opportunities for everyone – remains unchanged.
Financial markets are becoming increasingly volatile due to escalating U.S.-China tensions and a looming global recession. As a result, stocks are plunging, and mutual funds aren’t the reliable investment instruments that they once were.