Alternative investment strategies have becomean increasingly important element of investmentportfolios. Often offered as a privatepartnership, any private investment is considered analternative strategy where physician-investors are thelimited partners and principals are the general partners.With all the buzz lately over declining hedge fundreturns, of which many have a traditionally shorterterm investment focus, opportunity exists in longerterm alternative investments such as private equity andreal estate—with the promise of high returns.
Buyouts and Venturing
Private equity represents one of the largest alternativeasset classes and involves ownership shares ofprivate companies. Due to the unique nature andilliquidity of this marketplace, physician-investorsdemand high returns from private equity. Successfulprivate investing involves an experienced managementteam as well as a conducive public equity environment.Because it is not unusual for private equitypartnerships to require a minimum 10-year investmentcommitment, returns must make it viable.There are two different types of private equity strategies:buyouts and venture capitalism.
Among the most common private equity investments,management buyouts help existing managementbuy an existing business. Today, buyout fundsconcentrate on arbitrage opportunities of addingdebt to their acquired company's balance sheet withmoderate return expectations.
Venture capitalists invest both money and timeinto emerging companies in an effort to launch thenext Microsoft or Google, creating value throughcareful deal organization and evaluation or perhapsvia syndication to share risk and improve access tocapital. Sometimes this high-risk private equityinvestment means funding a "company" that has justa few bright entrepreneurs and a business plan.Because this is a risky alternative strategy, physician-investorsrequire substantial returns. Since venturecapitalists tend to specialize in a given industry orregion, it is important for them to find other forms ofinvestment diversification.
Real Estate Partnering
Offering income-oriented returns, real estate partnershipsinvest in institutional quality projects. Ingeneral, commercial real estate has provided competitivereturns to high-net-worth physician-investors.Historical volatility has been lower than that of comparablepublic markets and real estate has historicallyperformed well in periods of inflation, offeringphysician-investors purchasing power protectionover extended investment time horizons. Real estateinvesting might include commingled (ie, private equity)funds, direct investments, or real estate investmenttrusts, which use a portfolio strategy.
Minimums and Risks
Only the wealthiest of physician-investors arequalified to partake in such private investment opportunities.Oftentimes not registered with the SEC,purchasing such alternative investment vehiclesrequire physician-investors to be qualified or"accredited," meaning the physician-investor musthave at least $1 million of investable assets or annualincome in excess of $200,000.
Why incorporate alternative investments into yourportfolio? High return potential is the main reason privateclients allocate assets to private equity and realestate. However, higher return potential comes withmore risks than public market investing. That high riskin addition to limited liquidity, taxes, limited information,and regulation make investing in alternativestrategies especially difficult without outside help.
Jack A. Ablin is chief investment officer of Harris Private Bank,
which oversees $40 billion in assets for individuals. To receive a
copy of Mr. Ablin's most recent Outlook for the Financial Markets
or for more information, please call 312-461-7756.