4 High-Return Alternative Investments to Consider

In today’s investment climate, traditional assets like stocks and government bonds often form the foundation of a diversified portfolio. However, with rising inflation and increasing market volatility, many experienced investors are turning to alternative investment options to achieve higher returns. These alternatives have become particularly attractive for those seeking to enhance portfolio performance while managing risk in uncertain times.

As the demand for alternative investments grows, high-net-worth and ultra-high-net-worth individuals have increased their exposure to these assets. In fact, allocations to alternative assets in these investors’ portfolios grew from 22% to 26% between 2017 and 2020. Below, we explore four alternative investments that have proven popular for delivering substantial returns.

1. Venture Capital

Venture capital (VC) involves investing in early-stage businesses with high growth potential. As one of the highest-performing alternative asset classes, VC offers the opportunity to target 5x to 10x returns, though this can vary. The UK’s venture capital industry has expanded significantly in recent years, with the total value of VC investment in the UK reaching a record £30 billion in 2021.

Although venture capital investments carry a high degree of risk due to the early stage of the companies involved, there are ways to mitigate this risk. For instance, UK-based investors can access venture capital opportunities through tax-efficient structures such as the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS). These schemes offer tax benefits such as income tax relief, capital gains tax exemptions, and inheritance tax relief, making VC even more attractive.

Despite the inherent risks, the potential for high returns combined with tax incentives makes VC a compelling choice for investors willing to take on higher risks in exchange for potentially greater rewards.

2. Private Equity

Private equity (PE) differs from venture capital in that it focuses on investing in more established, unlisted companies. While venture capital targets early-stage businesses, private equity typically involves investing in firms that are further along in their development but still not listed on public markets. The UK’s private equity market has been booming, with 1,545 deals valued at £159.2 billion in 2021.

Private equity investments generally offer a lower risk profile than venture capital, as the companies involved tend to have established operations, customer bases, and revenue streams. However, the returns are typically lower than those seen in VC investments. Despite this, private equity has shown itself to be a strong performer, with 42% of investors reporting annual returns of over 16% on their private equity portfolios.

For investors seeking a less risky alternative to VC but still aiming for substantial returns, private equity offers a valuable opportunity. Access can be gained through co-investment platforms, private equity funds, or direct investment into private companies, though each option has its own risks and considerations.

3. Joint Venture Property Investments

Real estate has long been a stable asset class with a proven track record of delivering strong returns. One way to access property investment opportunities without the traditional requirements of buy-to-let properties is through joint venture (JV) property investments. In a JV, investors collaborate with property developers to fund and manage property projects. This allows investors to gain exposure to property markets without being directly involved in construction or maintenance.

JV property investments can offer significant returns, often around 1.5x the money invested (or 50% returns). By pooling capital with experienced developers, investors can minimize the risks associated with property development. This method also eliminates the need for additional costs such as management fees, making it an appealing option for those looking to invest in real estate with less involvement.

While JV property investments can provide high returns, they come with some risks, including the possibility of project delays or cost overruns. Thorough due diligence on the development team and the specific project is essential to reduce these risks and ensure the success of the investment.

4. Direct Lending Opportunities

Direct lending is a form of private debt where investors provide loans to businesses or individuals, often through peer-to-peer lending platforms. This alternative investment offers higher interest rates compared to traditional savings accounts and has become increasingly popular as a way to access inflation-beating returns.

One prominent example of direct lending in the property market is property bonds or loan notes, where developers raise capital to finance residential or commercial projects. These bonds typically have fixed terms, ranging from two to five years, and offer interest rates between 4% and 15%. Investors can benefit from returns that outpace inflation, particularly in today’s market.

One key advantage of direct lending opportunities is the potential tax benefits. Through the Innovative Finance ISA (IFISA), introduced in 2016, UK investors can enjoy tax-free returns on eligible lending investments. However, as with all lending investments, there are risks, particularly the possibility of a borrower defaulting on the loan. Direct lending opportunities are generally less regulated than traditional financial institutions, so investors need to perform thorough due diligence before committing.

Final Thoughts on Alternative Investments

Alternative investments, including venture capital, private equity, joint venture property investments, and direct lending, provide investors with attractive opportunities to achieve high returns and diversify their portfolios. These assets often offer superior returns compared to traditional investments, especially in volatile economic conditions. However, they also come with higher risks, which can vary depending on the asset class and investment structure.

For investors looking to enhance their portfolios and maximize returns, alternatives are increasingly becoming a key component of investment strategies. That said, due diligence and a clear understanding of the risks involved are essential to making successful investments in these high-return asset classes.