investing in alternative assets
Historically, most people start their investing career with traditional assets such as stocks, bonds, and cash or cash equivalents. And many of them are happy to stay in that lane for their entire life. Recently, however, a multitude of startups have tried fractionalizing and democratizing investing in non-traditional or alternative asset classes.
By definition, fractional ownership is a percentage ownership of an asset. The popular trading app, Robinhood popularized the idea of fractional shares. For instance, before fractional shares were available, one may have had to shell out $3,500 for a single share of Amazon stock. Now you can buy $1 worth of Amazon stock using fractional shares. This fractionalization of assets gave investing access to a swath of investors who were previously on the outside looking in.
Moreover, this fractionalization method was then applied to alternative asset classes to bring in even more new investors. Alternative asset classes include art, commodities, real estate, private startups, collectibles, and more.
Let’s walk through a few alternative investments you may not be aware of, and how they could possibly benefit your portfolio throughout your investing career.
Fine art is an interesting asset class — one that has typically been reserved for the elite and sophisticated crowd. However, two recent technical advancements in the art world have lowered the barriers to entry when it comes to purchasing artworks: fractionalization and non-fungible tokens (NFTs). The former focuses more on physical art, and the latter focuses more on digital art.
While NFTs have technically been around since the 2012-2013 timeframe, they really didn’t start picking up mainstream attention until late 2020 and early 2021 when some digital rocks and pixelated punks began selling for millions of dollars.
For the layperson, NFTs are a unique and non-interchangeable unit of data stored on a digital ledger (the blockchain). NFTs can take the form of easily-reproducible items such as photos, videos, audio, and other types of digital files. Blockchain technology gives the NFT a verified and public proof of ownership. The lack of interchangeability (fungibility) distinguishes NFTs from blockchain cryptocurrencies, such as Bitcoin.
You can buy and sell NFTs on sites like OpenSea — the first and largest peer-to-peer marketplace for crypto-goods (like an eBay for crypto assets), which include collectibles, gaming items, and other virtual goods backed by a blockchain.
So why should you invest in NFTs? Well, for the most part, they still appear to be a highly speculative asset and the space feels outright bubbly. But beauty is in the eye of the beholder, and you’ll never know if someone else is willing to take a pixelated image off of your hands for 10-100x what you purchased it for. Personally, I’ve dabbled in NFTs just to get a better understanding of the space as it relates to the future of art.
For those looking to catch potential upside on physical art, there’s also a company for that. Masterworks, founded in 1989, buys and stores a number of paintings by famed contemporary artists like Andy Warhol, Jean-Michel Basquiat, and Yayoi Kusama. The company then sells shares of various artworks in qualified public offerings that are registered with the SEC, allowing investors to trade those shares on its secondary market once an offering closes. Shareholders get paid out when Masterworks eventually sells a painting.
I’ve personally invested in two pieces of art through Masterworks — a Basquiat and a Mitchell. I anticipate adding to my art portfolio in the future and will tuck them away for as long as I can.
You’re probably asking yourself again why you should care about investing in physical art. The answer lies in asset diversification and non-correlation. Non-correlated assets are assets that are differentiated in such a way that their value shifts differently than the broader market. Another reason this may be an attractive investment comes from data provided by Artprice, where they claim blue-chip art has outperformed the S&P 500 by 180% from 2000–2018.
Tech startups and pre-IPO companies have the potential to offer huge upside for investors. Imagine getting access to shares of private tech companies such as Coinbase before they went public.
Traditionally, investing in startups has been a risky bet, as a high number of them eventually fail. Some sources claim 90% of startups eventually fail and 10% of them fail within the first year. That’s why you typically have to be an accredited investor who understands the risk and can (theoretically) shelter yourself in case of complete loss of capital.
There are now companies out there who allow access to invest in these private companies — Fundnel, SharesPost, and EquityZen, to name a few.
How do they work and why do you care? Let’s use EquityZen as an example.
EquityZen is an online platform that connects venture-backed private companies and shareholders for trading pre-IPO shares.
They operate a marketplace in which employee shareholders in private companies can make their equity available to outside investors. In addition to traditional share transfers, EquityZen introduced a new offering in the private shares market by working with the issuer to register a transfer of shares so employees and early investors can sell a portion of shares for cash without having to wait until an IPO or acquisition.
What’s great about this product is you don’t have to be a venture capitalist or work for one of these startup companies to invest directly in them. The recent trend has been for private companies to stay private longer before going public. This means those who had early access to shares in the company reap the benefits.
Investing in private companies as a layperson could be a daunting task, as they are not required to provide as much financial information as publicly traded companies. However, that shouldn’t shy you away from looking into this alternative asset class that offers potentially high rewards. Just do some research and due diligence before diving in head first.
Commercial Real Estate (CRE)
Billionaire Andrew Carnegie famously said that 90% of millionaires became wealthy through owning real estate. Historically, real estate has consistently increased in value over time and has outperformed other investments.
But the problem for many of us is that we don’t have large amounts of capital laying around to purchase an entire building outright or join a deal as a limited partner. Also, unless you’re buddy-buddy with a bunch of high net worth individuals, you may not even get a seat at the table to talk about that pretty little parking garage you’ve had your eye on. And lastly, unless you’re making hundreds of thousands in revenue each year, you wouldn’t have access anyways due to accreditation requirements.
A new startup called LEX is trying to fix all of these problems. They realized there was no centralized market for non-insiders to find single-property real estate investment opportunities and to participate side-by-side with the institutional insiders. So they created it themselves.
According to LEX, their mission is to empower wealth creation by solving real estate’s access and liquidity problems. Investors buying shares of a building on LEX are buying equity in a partnership vehicle that owns a minority stake of equity in a building.
This structure enables wealth creation in several ways:
Cash Flow: As the tenants pay rent, the shareholders receive distributions. The distributions for each asset are expected to be paid quarterly. And while the distributions are not guaranteed, the owner of the building must pay distributions to shareholders if they pay distributions to themself.
Tax Benefits: Being structured as a partnership allows many of the benefits of CRE ownership to pass through to the shareholder as K-1 investments (not 1099 investments).
Alignment & Protection: Because the owner retains a majority of the equity, they still have “skin in the game” and are motivated to operate the asset efficiently and attempt to produce healthy returns for shareholders. While the asset owner retains control of the building, there are several investor protections built into the LEX offering structure, including protections against insider sales, outsized management fees, etc.
Land is one of the oldest investment classes in existence, producing vast wealth over generations.
For all of the city dwellers out there who’ve dreamt of greener pastures, getting off the grid, and owning some land, there is now a simple and easy way to do it from the safety of your concrete jungle.
FarmTogether’s investment offerings are legal entities, most often LLCs, that own the titles to your investment property. When you invest with FarmTogether, you purchase shares in an LLC. You become a fractional owner of the farmland and are entitled to returns from its operation
Cash payout from rental income and/or operating income are proportional to your ownership in the LLC, so a $50,000 equity investment in a $5M equity offering would entitle you to 1% of the returns.
AcreTrader has a similar platform to buy and hold farmland. The minimum investment amount varies for each individual listing. Depending on the total size of the offering, price per acre, and other factors, most of their offerings require a minimum initial investment of $10,000-$25,000. The minimum investment amount will typically be the equivalent of 1-4 acres, given that most farmland sells for $3,000 to $10,000 per acre.
Both of these platforms require the buyer to be an accredited investor.
With decent returns and low fees, it is a compelling choice for those looking to diversify their portfolios. Farmland has low volatility compared to most other asset classes. An article in Investing Daily called agriculture a “well-positioned hedge” against stock market volatility, claiming that “agriculture has the properties of a late-cycle investment because of the sector’s projected robust and stable growth for decades to come.” Even during adverse market conditions, farmland has proven to be a secure investment. The NCREIF has not reported a negative year in almost two decades.
Investors now have a ton of options to choose from with regards to their alternative asset class investing strategy. Diversification still remains one of the key tenets to having a successful investing journey and a well-rounded portfolio, and these opportunities to invest in alternative asset classes are a nascent boon for the layperson. My suggestion: Dip your toe in the water before diving in head first and always do your own due diligence. And remember: This is not official financial advice; seek an accredited financial advisor before investing your own money!
~ Ramp Capital LLC