Public Bang in Europe: Private Equity and Infrastructure

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Investment bang in Germany and Europe - how to benefit with portfolio management strategies of the ultra-wealthy playing alternative investments

The setting: The German coalition-government in the offing has secured a substantial budget with parliament. This debt will have to be repaid or restructured by today's young people in the future. If economic growth leads to higher public revenues, this may be acceptable, otherwise performance incentives in Germany will be further reduced long-term and talent will look elswhere. But how can you benefit from this budget explosion to be invested in infrastructure and defence? Buy defence and real estate equities on the stock market? This could be difficult, as a large part of the expectations for the future are already factored into the share prices and as investor you will receive the individual problems of each company bought plus market risk automatically. Access should better be searched in alternative investment space, heavily played by semi-institutional investors, family offices and endowment funds since a long time. So, let's take a look at this universe.

What are alternative investments?

Alternative investments are asset classes outside the traditional liquid investment space with equities, bonds or cash. They include private equity and venture capital, hedge funds, infrastructure and commodities, for some also real estate and collector's items such as art or classic cars.

Alternative investments are characterized by their low correlation with liquid markets, which makes them particularly attractive for portfolio diversification.

While institutional investors and family offices have been using alternative investments for a long time, they are also becoming increasingly important for wealthy private investors. Private equity and other alternative investments offer potentially higher returns than traditional asset classes, but are often associated with longer holding periods and lower liquidity. Only capital that is not needed elsewhere in the longer term can be invested.

For private investors, alternative investments represent an opportunity to reduce market volatility in their portfolio and achieve above-average returns in the long term. According to the UBS Global Family Office Report, many ultra-wealthy people have a significant share of alternative assets in their portfolios. These can have a stabilizing effect in times of crisis and are usually less affected by short-term market fluctuations.

An analysis by Moonfare, a fintech platform for private equity investments, shows that alternative investments have become increasingly popular in recent years.

A key advantage is the opportunity to invest in companies before they go public and thus benefit from the growth potential of private markets.

A long-term strategy with a high share of alternative investments could also be of interest to private investors if their risk appetite and liquidity profile allow for it. The most important strategies would be:

Private equity as a return driver

Studies show that private equity funds have historically generated above-average returns. The ultra-wealthy often invest in buyout and growth funds that target established companies with high growth potential. In contrast to venture capital, these late-stage investments have a more balanced risk profile.

Venture capital for high-growth

Investments in start-ups via venture capital enable to invest in promising technologies and business models at an early stage. The multi-family office HQ Trust, for example, advises its clients specifically on VC investments in up-and-coming sectors such as artificial intelligence or biotechnology in order to benefit particularly from modern trends during periods of economic quantum leaps. However, venture capital represents one of the highest risk classes and is not financially and psychologically suitable for all investors.

Hedge funds for risk diversification

Hedge funds today offer various strategies for hedging risk and optimizing returns. Many family offices use non-directional strategies to bring stability to the portfolio in volatile market phases. According to the UBS Global Family Office Report, the European and US ultra-wealthy in particular rely on hedge funds for diversification. Limitations on liquidity exist here as well, but there usually gates for redemption are given.

Commodities as diversification

Gold, silver and other commodities are seen as crisis protection and inflation hedges. Rare earths have become of particular interest, as they are used in batteries or industrial production. However, the laws of supply and demand from private and industrial consumption, speculative purchases and central bank activity in the case of gold are often only understood by experts. And gold neither pays interest nor dividends and volatililty is similar to that of stocks. The price is negatively correlated with the external value of the US dollar, so a clear view on the forex market is also needed.

Access to alternative investments for private investors

While alternative investments were for institutional investors and big private wealth only in the past, platforms such as Moonfare, NAO, LIQID, AlphaQ Ventures and others now provide private investors with direct (online) access to alternative investments at lower entry levels.

In view of the expected surge in investment in Germany and Europe, it may therefore make sense to invest capital that is not required in the longer term in private equity with infrastructure funds. One can choose brown-field or green-field funds: in the former, projects are invested still in the planning phase, while the latter buys into established structures, thus cash flow can be predicted with much higher certainty. Unlike in the classic buy-out sector, the returns on cash-flow-oriented infrastructure funds are usually lower, but so is the risk. For private investors, these could therefore be good alternatives to the liquid financial markets at the right time – just think of the inflation risk in Trumponomics. There are as yet no established funds for defense, but relevant offers in this area can be expected.

To sum it up: Alternative investments play a decisive role in the portfolio management of the ultra-wealthy. Through targeted investments in private equity, venture capital, hedge funds and other real assets, wealthy investors create a balanced mix of potential returns with reduced risk from financial markets. Limitations on liquidity are the price for it. In the current environment, there are good arguments speak in favor of private investors tapping into the private equity sector now. Infrastructure funds could be a good start.