By Ellie Pigott
For many, when they hear the word investing, they think of the stock market, retirement funds or maybe even crypto. But the possibilities don’t stop there. For those whose lifestyle can allow a less liquid investment vehicle, alternative investing is a great option. There are several vehicles to choose from including private equity, venture capital, angel, real estate, storage unit investments and more.
Here are several investment vehicles we have come across.
1. Private Equity
While private equity takes many forms, the overarching definition is investing in private companies either directly or through a fund. This can be done to gain shares of the company or to acquire the company.
Unlike the stock market, these investments have very long holding periods. Private equity firms typically exit between 3-5 years, but investors can expect waiting up to 10 years for their return.
Over the last 20 years, returns in private equity have averaged higher than that of the S&P 500. The current average PE return in the U.S is just above 10%.
2. Venture Capital
One of the many forms of PE is Venture Capital. This investment vehicle still invests in private companies but the companies receiving investments are startups with large potential for growth.
As opposed to the start-up going to the bank to receive a loan or running a crowdfunding campaign, the VC option provides the startup with both capital and expertise.
This can be extremely beneficial to entrepreneurs, especially those who lack industry knowledge in a certain area. For example, if the founder has a great vision for the company but doesn’t know much about accounting and finance, the VC firm would help fill that knowledge gap.
VC funds are typically 10 year hold periods that can extend to 12 years depending on their needs. Investors become Limited Partners (LP) in the fund and can experience tax benefits such as 1202 stock treatment, reducing overall tax liability.
VC Fund managers act on behalf of the fund to source investment opportunities, perform due diligence on companies and founders, and assist startups to growth and eventually exit.
At Traction Capital, we help connect investors with our portfolio companies that are directly related to their expertise. For some this can be mentorship, a board seat, or more, depending on the investor’s level of interest and availability.
3. Angel Investing
Similar to Venture Capital, Angels also invest in startups. This type of alternative investing is for individuals with high net worth, who provide the funds directly to the company. In most cases the capital is in exchange for equity of the company.
Because such high capital is needed, Angels typically need to become an accredited investor before investing. This ensures a level of stability and prohibits just anyone from claiming to be an Angel.
As opposed to a VC or PE fund, where a firm is doing the due diligence, this type of investment normally requires your own time and research. To spread their risk, many Angels invest in several startups at the same time, across various industries.
Another way Angels lower their risk is by going in on a deal with multiple angels. This requires a network of trusted, well backed individuals. There are Angel networks for investors to join, some which provide deal flow, industry experience and educational opportunities.
4. Real Estate
During the pandemic the real estate market skyrocketed, but even prior, the market had been consistently climbing. Over the last 10 years the market has grown an average of 5% year after year, not including 2021, in which the market grew 17%.
Across the board, annual rate of return in real-estate has averaged 10% over the past 10 years. Investing in real estate can take many forms.
The more hands-on forms include owning a rental property or flipping a house. However, if you are looking for a hands off vehicle where your money can grow over time, a Real Estate Investment Trust, Mutual Fund, Limited Partnership, or Investment Group might be a better fit.
REITs are publicly traded shares of a commercial real estate company that owns many properties. In a Real Estate Investment Group, you buy into the fund by purchasing property, that property is then managed by the investment group. Lastly, a Real Estate Mutual Fund is an investment vehicle requiring less capital. This type of fund is more liquid, as they primarily invest in REITs, instead of purchasing property.
5. Storage Unit Investments
Just as VC is a division of PE, Storage Unit Investments are a division of Real Estate. There are several ways to go about investing in a storage facility, the main three being REITs, Self-Storage Syndicate and buying a property.
The first is the least risky and arguably requires the least amount of day-to-day work. Because REITs are publicly traded, they have strict regulations that help protect against fraud. Like any REIT, storage unit investments are great for consistent growth over a long period of time.
The second option is a syndicate. This allows investors to pool their money with other investors to purchase a facility that would then be managed by the sponsor of the fund. Like a VC fund, the investors would be LP’s, with basically no liquidity, but high potential returns.
The third option is to buy the storage unit facility and manage it yourself. Although the profits are consistently climbing, this requires a lot of upfront capital, as well as management knowledge. This option also requires the most hands-on work, as opposed to the others, which allow your money to sit and grow over time.
With so many alternative investing options, deciding on the right one can be challenging, confusing, and time consuming. If your lifestyle can allow illiquidity, alternative investing is a great way to not only diversify your portfolio, but to get involved with a founder or project that you enjoy and can help grow. The most important thing to keep in mind with any of the options is history and legitimacy of whatever investment vehicle you choose. Always be sure to do your research and collect all relevant data before committing any capital.
Traction Capital is a private equity and venture capital firm based near the Twin Cities. Unique from others in our industry, our entire team is made up of entrepreneurs.
As a team full of entrepreneurs that have successfully run and exited companies, we are well equipped to advise and assist our portfolio founders with any challenges that might arise.
If you or someone you know is interested in raising capital or you’re interested in alternative investing options like private equity or venture capital, reach out to us at firstname.lastname@example.org. In addition, be sure to watch our Resources page for info regarding our potential investor events!