• Alternative Investments

Cash is King

calendar_today June 5, 2018

For the past decade, we have watched the markets reach unprecedented heights with yields plummeting along the way. As the country continues to get older and baby boomers fade from the work force, the need for income has never been higher.

However, with rates finally on the rise again, the significant 40-plus year bull market in fixed income appears to have run its course. Due to central bank interventions, the cycle expanded well beyond anyone’s reasonable expectations and it left investors pumping money into any yield-oriented strategy across the market spectrum. Those investors are now seeking to diversify their yield generating investments as rates begin to creep back up. Risk is rampant in yield focused public market securities as evidenced by the rocky road REITS have endured so far this year.

As a result, we are hearing one constant refrain as we speak to advisors across our financial services network: we need more alternative strategies focused on yield. Investors willing to sacrifice some liquidity in exchange for more non-correlated cash streams are being rewarded.  For this reason, alternative investment funds that provide regular income back to investors are in high demand.

Here are four opportunities that will increase yield this year:

Private Real Estate

Despite the performance of REITs in 2018, private real estate remains a viable solution for advisors willing to lock up capital. Private real estate could be considered a controversial asset class right now due to the sheer number of funds in the market, however, niche operators who prudently invest in the right segment and locales of this market are offering compelling opportunities.

Real Estate Credit

Real estate credit strategies are also very attractive at this time, as investors are investing in positions that are higher in the capital structure and therefore not as exposed to a possible correction in the real estate markets. This strategy still provides very strong cash on cash yields, but the investment horizon is often shorter and thus investors’ capital is locked up for less time. From our conversations in the space, a five year lock up while generating mid teen IRRs and decent cash flows are becoming more common.

Private Credit

In general, private credit remains of interest but we are nervous about the ramifications of the next big economic slowdown on corporate credits. While lending standards are certainly better than what preceded the credit crisis, the amount of private capital chasing direct lending deals has impacted investor protections as these new loans are underwritten. For this reason, smaller, more niche specialist managers provide capital to companies in this space who are disciplined in their underwriting terms are drawing advisor interest. We are also seeing demand for funds that specialize in public finance to mitigate some of the broader concerns in corporate credit.

Royalties

Other compelling opportunities that continue to attract advisor capital are in the royalty space. Funds specializing in film, music or health care royalties offer an interesting cash return stream back to investors without the traditional risks associated with credit investing.

Generally speaking wealth advisors are hungry for more alternative strategies as the markets reach historical peaks, but the fund sponsors who provide a strong income component are drawing the most interest.  As the adage goes, cash is king.