Against a backdrop of persistent rate hikes, inflationary pressures, and fears of recession, investors are searching for opportunity as returns from traditional allocations decline. With the ‘safe’ rate of treasuries rising, what asset classes might deliver enhanced yields?
In our March 23 webinar, the founders of Percent, Groundfloor, and Vinovest sat down with Vincent’s Eric Cantor to explore how alternative investments such as private credit, real estate, and wine can help stabilize and deliver growth to investor portfolios in challenging markets. The wide-ranging conversation covered markets, allocation, risk, and liquidity. We are pleased to provide some of the key takeaways, and the full replay is available on demand.
Diversification is essential
Diversifying your portfolio provides a better opportunity to hedge against market conditions, according to Percent’s Nelson Chu. Alternative investments could provide an edge in this environment. As investors search for opportunities that could outpace inflation, providing outperformance to beat the benchmark rate, they may want to consider diversifying across uncorrelated investments in a mix of geographies, business sectors, and asset classes.
For Groundfloor’s Brian Dally, structure is the key. Groundfloor lets investors ‘be the bank’ and invest in residential real estate as a debt investor. According to Brian, the debt structure not only provides the investor with full returns since there is no intermediary, but also repays debt investors ahead of equity investors. He notes that debt investors also don’t face the same price appreciation risk as equity real estate investors.
“More than ever, diversification is the name of the game. You have to hedge yourself against the market conditions.”Nelson Chu, Founder and CEO of Percent
Wine and whisky can provide a rare piece of stability for portfolios, according to Vinovest’s Anthony Zhang. Considered luxury goods, these assets have longer hold times and are typically seen as more recession-resistant. Zhang believes that steady, low double-digit returns might be particularly appealing to investors experiencing the flip side of the meme stock and crypto run-ups.
The impact of inflation — and the shadow of recession
The different nature of these asset classes translates into how they are affected by inflation.
- On the Percent private credit platform, Chu points to shorter duration investments and the ability for investors to choose the price at which they will invest. This provides real-time input and feedback on the market environment – as benchmark rates rise, so too does the investor threshold for yield, which affects how deals are structured and terms set.
- Vinovest’s physical product requires labor, gas, shipping, storage, etc. Rising inflation or supply chain issues increase costs across the board, which can factor into the release pricing for new or library vintages.
- Groundfloor mostly writes 12-month loans which are generally repaid in 10-12 months. Investors are repaid with interest, with default interest charged on any late loans which could give affected investors an additional premium. At the same time, rates are edging up based on increasing demand for capital.
The founders also addressed the potential for recession and how that might play out for investors.
- Private credit emerged from the global financial crisis and was further battle tested during the global pandemic. Chu confirms a flight to quality, which is good for the market, and sees opportunities for investors to find diamonds in the rough with exposure to sustainable, well-managed businesses at discounted rates.
- Groundfloor’s Dally noted that borrowers who can tap capital tend to make the most money during a recession because they can buy at better prices. This results in more active loans and higher rates for the investors providing essential capital to fuel purchasing.
- According to Zhang, an analysis of 2008-9 showed that the main holders of luxury assets were pretty well insulated from a recession. For an investor with maturing wine, a recession that hits a few years into a 10-year ‘time to drink’ window has limited impact as you wouldn’t look to drink or sell the wine early.
Options to help investors explore
Since investors have different investing styles, strategies, and preferences, all three companies offer a variety of offerings. Investors can directly pick a specific investment or select a managed option that provides automatic diversification within and across assets.
Allocation and the challenge of due diligence
Investors should pay attention to correlation as they expand their portfolios to include alternative investments. In addition to looking at how those assets perform against traditional markets, they may want to balance out any riskier assets with investments that have lower overall volatility. Liquidity is also important: investors will generally look at durations to facilitate access to capital over different timeframes.
Due diligence is critical, and each founder stressed up-front evaluation and ongoing monitoring. While this has historically been a challenge in private markets and alternative investments, all three platforms have invested heavily in providing tools and information to investors. For Groundfloor, that meant building a regulatory framework under Regulation A, filing an offering circular with the SEC, providing monthly statistics on every deal, and meeting regularly with investors. Vinovest has focused on building an infrastructure that provides investment performance information for wine, partnering with insurance companies, and providing transparency on provenance and storage.
For Percent, Chu notes the company has created technology to model similar levels of standardization and transparency for private credit markets as investors expect in public markets. This includes setting and disclosing market and underwriting standards, credit enhancements, and modeling assumptions. This data, combined with detailed performance information on the underlying assets, helps investors understand how each deal was structured and priced and better quantify risk. Comparison and surveillance tools let investors evaluate investments up front and monitor performance historically and throughout the lifetime of the loan. Percent’s portfolio management tools, post-investment support, and access to investor relations experts round out the information continuum.
A look ahead
In response to Eric Cantor’s request for closing thoughts, Vinovest’s Zhang points to a sea change, with investors seeking connection and leading with their interests when choosing investments. Groundfloor’s Dally believes retail real estate investing is only in the second inning, with significant opportunity ahead as the platform matures and scales. Observing that the only truly predictable thing is unpredictability, Percent’s Chu notes that past markets show that investors can always find opportunities.
About our panelists
Moderator Eric Cantor is the co-founder and CEO of Vincent, the first digital asset manager for alternative assets. Vincent helps investors build portfolios including venture, art, collectibles, private credit, real estate, crypto, and more. www.withvincent.com
Percent founder and CEO Nelson Chu. Percent is an alternative investment platform focused on private credit, giving investors the option to invest in asset-backed loans or corporate debt. percent.com
Groundfloor co-founder and CEO Brian Dally. Groundfloor offers retail investors the chance to invest in residential real estate via fractionalized debt securities, accessing a tangible asset class previously available only to institutional investors. groundfloor.us
Vinovest co-founder and CEO Anthony Zhang. Vinovest is an investment platform for wine and whiskey, helping investors diversify their portfolios and directly own appreciating bottles as well as casks of rare wine and whiskey. vinovest.co