Research-Based Investing – Alternatives Q&A With Michael Foley
I recently did a Q&A interview regarding alternative investments and given the current economic situation, I wanted to share that interview with you.
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As the equities market experiences volatility like never before, investors are turning to an asset class long used by institutional and ultra-high-net-worth (“UHNW”) investors to shield from Stock Market uncertainty – alternative investments.
For novices, exploring the new world of alternative investments can be daunting. That’s why having an expert in your corner who has experience navigating these alternative waters can be invaluable.
Michael Foley, founder, and CEO of MF Development, LLC (dba Humabuilt Homes), is one such expert.
He’s here to share his insights into the world of alternative investments from his years of investing in this non-correlated asset class:
How do alternative investments differ from traditional investments?
Traditional investments, including stocks, bonds, and their various by-products like mutual funds and ETFs, are traded on public exchanges.
Historically, the big draw of public exchanges has been their access and liquidity. Investors starting out can buy as little as one share, and in this day and age, because of mobile technology, it can all be done in an instant. Additionally, because of public company disclosure requirements, it’s assumed that a stock’s price is fair and reflects all available information.
This market efficiency is another draw of traditional investments, but this, along with liquidity, closely ties these investments to the broader markets, rising and falling with major economic indicators like unemployment rates, inflation, interest rates, housing starts, etc.
In contrast, alternative investments are private investments outside of stocks and bonds.
Common alternative investments include private equity, venture capital, private funds, and real assets such as real estate, commodities, precious metals, agriculture, fine art, and even intellectual property like patents.
Alternative investments are typically less liquid than traditional assets with long-term investment windows and with moderate to low correlation to the broader market.
A word of caution. Although technically considered alternative investments, because hedge funds traffic in public equities – albeit using alternative strategies – they are nonetheless closely tied to public exchanges. Due to their close association with public exchanges and poor performance in the last decade, hedge funds have fallen out of favor with many sophisticated investors.
What opportunities do you believe alternative assets hold for the average investor?
Alternative assets offer the potential to deliver above-market gains uncorrelated to Wall Street, but non-correlation doesn’t mean any risk. That’s why investors need to be educated on the unique risks associated with the various segments.
Private equity, venture capital, precious metals, real estate, and other alternative investments all have the potential to be lucrative. Still, each class has its unique set of the risk-return profile, liquidity, and barriers to entry.
It’s crucial investors educate themselves on these relevant factors to ensure their investment objectives align with the investment criteria unique to each asset segment.
What kind of access does the average investor have to alternative investments, and what are the barriers to entry?
Thanks to the JOBS Act that launched in 2016 that loosened the advertising restrictions on businesses seeking private capital, alternative investment opportunities are now available to qualified investors never like before. They offer investors the opportunity to invest in alternatives like real estate, technology, energy, precious metals, etc. that were unavailable before because of the lack of access or high cost of entry.
Investor qualifications may vary depending on the investment platform. Offerings made on established crowdfunding platforms have low minimum investments (as low as $100) and minimal investor qualifications.
Advertised private offerings on non-crowdfunding platforms have more stringent investor requirements, including accredited investor qualification and verification requirements. These offerings also have higher barriers to entry – typically minimum investments of $25,000, $50,000 and above.
For individuals, an accredited investor is somebody with either:
- A net worth exceeding $1 million individually or combined with a spouse (excluding the value of the primary residence)
- An earned income exceeding $200,000 ($300,000 combined with a spouse) each of the last two calendar years, with the expectation of maintaining the same income during the current year.
In addition to having to meet the financial criteria for qualifying as an accredited investor, this status must also be verified.
This can be accomplished in one of two ways:
- Accreditation can be verified by a qualified, independent third party familiar with the investor. Qualified parties include a CPA, attorney, or wealth advisor attached to a registered broker-dealer. These qualified third-parties can verify an investor’s accreditation status simply through a one-page letter.
- Verification can also be accomplished through a third-party commercial provider such as VerifyInvestor.com and www.earlyiq.com, who will review personal documentation such as W-2s, tax returns, or account balance statements to ensure the satisfaction of the financial criteria for qualifying as an accredited investor.
What are the drawbacks and advantages of long tie-up periods?
Some investors might consider the illiquidity of long lockup periods a hindrance if they encounter a situation where they need liquid cash for an emergency.
In response to that, I would say that unless an investor is willing to let go of their funds for some time, this type of investment may not be right for them. The long lockup periods are for their benefit. It allows fund managers to grow the business without disruption, which in the long-term will result in above-market returns with little volatility.
It’s this illiquidity that protects investors from the turbulence of the broader markets.
Are there certain alternative assets you’re drawn to as opposed to others?
I prefer assets that offer three components:
- Cash Flow.
Cashflow builds wealth through compounding. Appreciation pads long-term returns, and tangibility protects against a total loss of investment.
What do you have to say to investors interested in dipping their toes in the waters of alternative investments like private investment funds?
Investing in alternative assets can be highly rewarding. Still, it is important to do your homework and due diligence before taking the plunge because some opportunities can entail a lot of risks.
You need to have tolerance for risk, but you can mitigate this risk through research and knowledge.
What research do you recommend before investing in an alternative asset? What do you look for in an opportunity?
You can look at the historical performance of particular assets, but that’s not a guarantee of success with a specific opportunity. I would say that with private investments, due diligence is the key.
Fortunately, access to management and transparency are far superior to private opportunities than with Wall Street offerings. Look at the management track record, scrutinize the business plan, evaluate the risks, and make sure the numbers are realistic.
What do you think are the most exciting investment opportunities in the next five years?
It’s tough to say what are the most exciting investments over the next five years because things can change on a dime.
I’ve never been into trends or the latest fads. I like assets that some consider boring but reliable.
Still, if I had to peg one segment that looks solid for the next five years, it would be multifamily because homeownership is becoming less and less affordable for many Americans.
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Michael Foley, president and CEO of Humabilt Capital, oversees the entitlement process, funding, and operations for Humabuilt Capital. Mr. Foley has been a full-time real estate investor since 1995 during which time he has developed hundreds of single-family homes, townhomes, condominiums, and apartments. Mr. Foley started his investment ventures in Long Beach, California, and has expanded to Apex and Durham North Carolina. Mr. Foley is a graduate of the University of California at San Diego.