One of the advantages of affluence is access to premier alternative investments unavailable to most individuals. These opportunities—such as equity in private companies, new ventures, and real estate holdings—enable one to create a more diversified portfolio, help mitigate stock market volatility, and provide hedges against inflation.
But these alternative investments come with their own set of unique challenges, including higher risk profiles, illiquidity, and greater complexity. When working with our Private Wealth clients at HORAN Wealth, we believe that financial empowerment comes from understanding both the opportunities and risks in every investment decision. These alternatives can provide long-term wealth-building potential, but they require careful evaluation, a long-term commitment, and strategic planning to achieve true growth.
Why Look Beyond the Public Markets?
Alternative investments have become increasingly significant for high-net-worth investors, and according to Professional Wealth Management (February 26, 2024), ultra-high-net-worth investors hold about 22% of their wealth in alternatives.
Investing in the S&P 500 implies concentrating your bet on a small group of large-cap U.S. technology and technology-related firms, which account for more than 30% of the index's weight and 61% of its year-to-date return. The 'Magnificent 7'—Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla—have dominated U.S. stock market gains in 2024 (Visual Capitalist December 11, 2024). For investors seeking to diversify their portfolios and access untapped opportunities, alternative investments offer a path to growth, stability, and inflation protection.
Alternative investments offer unique opportunities, but they also come with significant risks. Each investment is different, with high variability in performance, liquidity, and long-term potential. To make a well-informed decision, you need a clear, objective understanding of both the rewards and the risks—one that goes beyond the surface and considers each opportunity's complexities.
At HORAN Wealth, we work with our clients to evaluate whether these investments align with their risk tolerance, liquidity needs, and long-term goals. This article explores three key options: Private Equity, Venture Capital, and Real Estate.
Private Equity: Reshaping Established Industries
Private equity (PE) offers investors stakes in private companies with high growth potential. Over the last 25 years, the number of publicly traded U.S. companies has dropped by half from 8,000+ to 3,618, shrinking opportunities in public markets (TheFamilyOffice July 7, 2024).
Meanwhile, private markets have expanded. While only 2,800 public companies generate over $100 million in revenue, more than 18,000 private businesses operate at that level (Hamilton Lane April 14, 2022). PE provides access to these high-performing firms, many of which lead their industries but remain private.
PE's track record is strong—delivering 13.1% annualized returns over two decades, compared to 8.6% for the S&P 500 (Smart Asset October 22, 2024). This advantage comes from long-term strategy, operational improvements, and value creation that public companies, constrained by quarterly earnings pressure, often cannot match.
With fewer IPOs and increasing private market value, affluent investors turn to PE to diversify portfolios, access high-growth opportunities, and invest in companies before they go public. PE firms specialize in identifying, restructuring, and scaling businesses—offering control and strategic growth beyond traditional stock investments.
However, investors must navigate significant challenges. Illiquidity is a major concern, as private equity investments often require long lock-up periods (7-10+ years) with limited exit options, making it difficult to access funds. Additionally, many PE deals use high amounts of leverage, which can amplify losses and increase financial risk during economic downturns.
Another key issue is valuation uncertainty—unlike public stocks with transparent pricing, private equity investments often rely on subjective appraisals, making their actual worth harder to determine (Financial Post July 18, 2024). Therefore, it's essential to balance the opportunities for growth of the specific PE investment versus your liquidity needs and risk tolerances.
Venture Capital: Fueling Innovation and Potential
For those seeking higher-risk, higher-reward opportunities, venture capital (VC) provides a compelling entry point into innovation. VC firms enable investing in innovation, technology, and early-stage businesses across sectors.
The private market offers a large, untapped opportunity set. While the number of public companies in the U.S. has declined by 35% since 1988, private companies have grown by 43% during the same period. This shift underscores the importance of accessing opportunities outside public markets, where innovation often thrives.
The challenge comes in selecting the specific innovative company to invest in. Instead, consider choosing a venture capital fund to spread investments across a portfolio of emerging companies. This approach has supported the rise of transformative businesses like Uber and Zoom.
However, VC investments come with unique risks. High failure rates are a major concern, as 60% of startups fail within five years, making venture investing inherently unpredictable. Investors must also be prepared for long time horizons, as venture capital exits—whether through IPOs or acquisitions—can take 5-10+ years, requiring patience and a long-term perspective.
Additionally, selecting successful startups is challenging, as even diversified VC funds do not eliminate risk entirely, and poor selection can lead to significant financial losses (National Bureau of Economic Research May 2020). Make sure to seek expert guidance to well-managed VC funds with proven track records that align with your long-term goals.
Real Estate: Tangible Investments for Stability and Growth
Real estate has long been a cornerstone of wealth preservation and growth, particularly during periods of inflationary pressure and economic uncertainty. Beyond owning physical properties, high-net-worth investors are increasingly turning to real estate investment, and development companies can provide access to income-generating assets without the hands-on management required for direct ownership.
With its ability to hedge against inflation and provide steady cash flow, real estate remains an attractive component of a diversified portfolio. It's a practical way to blend tangible assets with long-term financial goals.
However, investors should be aware of key risks. Interest rate sensitivity can significantly impact real estate values and borrowing costs, as rising rates tend to reduce affordability and decrease property valuations. Additionally, real estate markets are highly volatile and vary by region, property type, and economic conditions, requiring investors to carefully access location and market cycles.
Liquidity is also a concern, as selling real estate can take months or even years, making it difficult to quickly access invested capital when needed (Invest.net December 20, 2024).
A Strategic Approach to Wealth
Alternative investments can play a valuable role in wealth-building, but they are not suitable for every investor. The risks of illiquidity, leverage, and market fluctuations require thoughtful planning and professional guidance.
At HORAN Wealth, we provide our clients with a balanced perspective, helping them assess opportunities and risks before making investment decisions. Our expertise ensures that investments align with individual risk tolerance, financial goals, and overall wealth strategy.
We are passionate about helping private wealth investors, businesses, and families navigate their wealth journey to live abundantly. Contact us to schedule a personalized consultation and explore whether private equity, venture capital, or real estate is the right fit for your portfolio.
HORAN Wealth is the marketing name of HORAN Securities, Inc. (“HSI”) and HORAN Capital Advisors, LLC (“HCA”). Securities offered through HSI, a dually registered investment firm, member FINRA | SIPC. HORAN Wealth Management (“HWM”) is the associated investment advisory firm. HCA is an affiliated investment advisory firm.
The information herein has been obtained from sources believed to be reliable but we cannot assure its accuracy or completeness. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Any reference to past performance is not to be implied or construed as a guarantee of future results. Market conditions can vary widely over time and there is always the potential of losing money when investing in securities. HORAN Wealth and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.