An alternative investment is an investment into an asset class other than the three traditional asset classes: stocks, bonds, and cash. Traditionally, alternative investments were only available to high-net-worth individuals and institutional investors due to its entry criteria. These investors were investing in the likes of art, wine, coins, venture capital and stamps.
As a result of the Fintech wave in recent years, investors (including retail investors) are now able to access new asset classes that were previously only available to sophisticated investors or financial institutions. In this article, we will focus on three major alternative asset classes: peer-to-peer lending (to both businesses and consumers), invoice trading and equity crowdfunding (including property). In 2020, almost globally across these three asset classes. No wonder many more investors are beginning to take notice and looking to tap into this new opportunity.
Alternative Investments Global Volume 2018-2020
Peer-to-peer (P2P) lending
Investors today now have the opportunity to lend money directly to consumers or businesses via fintech platforms all around the world. You are able to diversify your investments across a broad portfolio of loans. The returns can be attractive: between 3% and 30% per annum. However, it does come with higher risks, especially when it comes to lending to consumers. There is no guarantee you will get your money back and you take on this risk. Hence, you will need to conduct some level of due diligence prior to deploying your funds.
Invoice trading is a new asset class where investors can purchase a company’s outstanding customer invoices (trade receivables) for a return. This amounts to advancing the company funds upfront for invoices that are due in 30, 60 or 90 days. When the company’s customer pays say 30 days later, the investor will then receive the principal plus return. The characteristics of this asset class are that of a short-term loan backed by an asset (the trade receivable) – secured and liquid. Returns are risk-adjusted according to the credit standing of the end customer or debtor (the party who is due to pay the invoice).
Check out InvoiceInterchange to understand further how this asset class can contribute to your investment portfolio
Equity crowdfunding allows the ‘crowd’ (multiple investors including retail investors) to fund businesses by purchasing an equity stake in the business. You are betting on the company’s valuation going up and then selling your shares for a return. The downside of this alternative investment is that it may take many years for such an exit to materialise (if at all).
What should you be looking out for when investing in alternative investments?
Across all different alternative asset classes, below are a few things you should bear in mind:
Security: Understand whether there is any security that backs your investment. With invoice trading, your investment is secured by a trade receivable which is an asset on the company’s balance sheet.
Minimum investment: What is the platform’s minimum investment amount?
Term: How long will your funds be locked in for and when will you see returns?
Fees: What are the fees you pay as an investor?
Depositing / withdrawing funds: What is the process to deposit and withdraw funds? Can the uninvested funds be withdrawn at any time?
Default policies: In the event your investment defaults, what role does the platform play to recover funds?
Platform as an ongoing concern: What will happen if the platform ceases operations?