In a landscape of increasing market volatility and changing global risks, alternative assets are essential to contemporary investment portfolios. Once primarily sought after by institutional investors, this asset class is now attracting high-net-worth individuals and family offices looking for diversification, long-term growth, and lower correlation with public equities and bonds.

Three product segments are attracting investors’ attention: commodities, primarily gold; growth to late-stage equity opportunities; and steady cash flow-generating credit investments.

Gold has been rising, reaching new highs due to global growth and concerns about inflation, which ongoing trade tariffs have exacerbated. Its role as a hedge against inflation and currency devaluation, coupled with increasing demand for semiconductors and other industrial applications, is likely to sustain its elevated demand. Historically, gold has provided an average annual return of 8% in USD over the long term. However, given the recent price surge, the unfavourable risk-reward balance may limit substantial gains in the short to medium term. Therefore, investors may consider gradually building their positions to achieve their desired asset allocation in this sub-asset class. 

Following the pandemic, many public and first-time private market investors significantly allocated funds to venture capital and private equity deals and funds. This trend was primarily driven by a fear of missing out on opportunities in this space. During that time, there was an expectation of rapid adaptation to various technology applications due to lockdowns and an increased reliance on remote support services, which resulted in high entry valuations for deals and funds. However, very few funds from that vintage have provided successful exits or increased their portfolio values, leading to a general lack of enthusiasm among investors for new allocations.

Investors should consider the investment horizons associated with the asset class and focus on the scalability and sustainability of the underlying businesses. These challenging periods can conclude positively, provided that business models remain intact and the business volume and profitability momentum continue. In these volatile times, this portion of the portfolio has contributed stability overall, acting as an uncorrelated asset class compared to traditional debt and equity, particularly in terms of price risk and long-term return potential.

New allocations, particularly growth and late-stage investments, seem appealing as they typically offer a weighted average maturity of 5 to 6 years from drawdowns to repayments. These investments also promise healthy internal rates of return (IRR) supported by targeted exit strategies. Given their enduring macro and microeconomic opportunities, we prefer managers actively seeking opportunities in energy transition and healthcare, as these areas are expected to have the highest potential for success.

Lastly, steady cash flow opportunities from credit funds focusing on traditional business lending to successful companies provide reliable cash flow generation. Most managers in this sector have not yet completed at least one full investment cycle since the transition from mutual funds (MFs) to Alternative Investment Funds (AIFs), as most funds have been launched in the past 5 to 6 years. During this period, delinquency risk has significantly decreased due to improvements brought about by the Insolvency and Bankruptcy Code (IBC), the Real Estate Regulatory Authority (RERA), and the Goods and Services Tax (GST). These changes have led to enhanced corporate compliance and increased disclosures.

However, investing in managers who maintain granular portfolios, manage smaller pools of money, have shorter maturities, and provide steady payouts is advisable. In the current environment, investors should avoid managers with significant allocations to microfinance and unsecured lending.

Alternative investments are not merely focused on chasing yield; they are crucial for constructing resilient, long-term portfolios that can perform well across various market cycles. Therefore, investors should maintain a disciplined approach to asset allocation and avoid emotional shifts between private and public market investments in response to market declines or other factors, except for limited tactical adjustments to their strategic asset allocation.

The author, Rajesh Cheruvu, is MD and Chief Investment Officer (CIO) of LGT Wealth India.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making investment decisions.