The rise of retail in alternative assets
Alternative assets (often shortened to “alternatives” or “alts”) are investment vehicles that don’t fit into the conventional categories of stocks, bonds, and cash. This includes private equity, hedge funds, real estate, commodities, art, franchises, and collectibles. For decades, alternative assets have been the exclusive domain of institutional and high-net-worth investors with the resources and expertise to access and manage them. In recent years, however, retail investors have gotten more involved in the alts space. So what changed? And how can you join the movement and benefit from this asset class?
In this blog post, we explore some of the reasons why retail investors are increasingly adding alternatives to their portfolios, and how those who are new to alts can get started.
Why retail investors are flocking to alternative assets
Several factors have contributed to the rise of retail investment in alternative assets, including:
In the U.S., regulatory changes have made it legal for a wider range of investors to access alternatives. The JOBS Act of 2012, for instance, relaxed the rules governing how companies can raise capital from the public, which made it easier for startups and other companies to raise money from individual investors. This particular regulatory change paved the way for crowdfunding platforms like Kickstarter and Indiegogo, making it easier for individuals to invest in private businesses in exchange for equity or other incentives.
More recently, in 2020, the Securities and Exchange Commission (SEC) expanded the definition of “accredited investor” to include individuals with certain professional credentials and those who are knowledgeable employees of private funds. The new rules made private equity and hedge fund deals fair game for a broader segment of the retail investor sector, which boosted demand even further.
Advancements in tech and online platforms built by innovative fintech companies have made it much easier for investors to access and invest in alternative assets. The broad appeal of these platforms is largely due to their simple and easy-to-use interfaces that allow users to invest with just a few clicks. As previously mentioned, crowdfunding also makes it easy to pool money and invest with relatively low minimums, and robo-advisors now offer automated portfolio management and advice based on the user’s risk profile and preferences. The rise of blockchain technology has additionally facilitated new alternative asset classes such as digital tokens, which represent fractional ownership of art, wine, and other alternative assets.
Seeking better yields
Disappointment in the performance of traditional investments like stocks and bonds has led some investors to seek alternative asset classes in hopes of better returns and risk management. In the past decade, bond yields have been historically low due to low-interest rates and quantitative easing policies by central banks. The impact of the COVID-19 pandemic was also felt across the bond market, reducing the income potential and diversification benefits of bonds for investors.
Also notable is that stock markets have been subject to frequent fluctuations and shocks due to geopolitical events, trade wars, pandemics, and other factors. This has increased the risk and uncertainty for investors who have turned to more stable alternative investments such as real estate, precious metals, and private equity.
Why retail investors should consider alternatives
Sophisticated investors know the value of expanding their portfolios beyond typical equity and bond investments, and alternative assets play a critical role in this strategy with a unique set of benefits.
A cornerstone of modern investing, diversification involves spreading investments across multiple asset classes to minimize exposure to any one type of asset. Alternative assets play a crucial role in diversification because they provide investors with a broad range of strategies and sectors to choose from. What’s more, alternatives typically exhibit a low correlation with traditional investment assets. While diversification can’t guarantee profit or prevent loss, it’s designed to help reduce volatility over the long term. By diversifying, investors can position themselves for more stable, sustainable returns.
Alternative assets have historically performed well during inflationary periods and can protect the purchasing power of investors’ portfolios. This is because the prices of these investments tend to either rise with inflation or rise steadily over time despite inflation. For instance, collectibles like wine, art, and classic cars typically increase in value as they age, regardless of market conditions, whereas assets like franchises can deliver higher returns as the prices of the goods or services they sell rise in conjunction with inflation. Overall, the ability of alternative assets to perform well in the long term has made them an attractive option for investors who are looking to protect their portfolios.
Alternative investments often provide exposure to niche markets or specialized investment strategies that are not available through traditional investment vehicles. Private equity funds, for instance, can invest in startups or distressed companies that have high growth potential but are not listed on public exchanges. Hedge funds can employ complex and sophisticated trading techniques that aim to generate absolute returns regardless of market conditions. Real Estate Investment Trusts (REITs) can provide exposure to commercial and industrial properties that may not be available through traditional real estate investments, while art and collectibles can offer aesthetic and cultural value as well as financial returns.
The rise of retail in franchise investing
With low volatility and high-yield potential, franchises are a proven performer among alternatives. The industry is highly regulated by both the Federal Trade Commission (FTC) and SEC, and investors can reap all the benefits associated with a real asset, including equity appreciation. However, traditional franchising is highly illiquid and involves high upfront costs, the need for deep operational expertise, and a large time commitment.
These barriers to entry have been insurmountable for many aspiring investors – until now. Thanks to a combination of technological and regulatory changes, passive franchise investing is available to retail investors.
Add franchise investing to your portfolio with FranShares
At FranShares, we take a unique fractionalized approach to franchise investing that allows people from all walks of life to own a portfolio of pre-vetted, fully managed franchises with great return potential. Also, our deep industry knowledge paired with no fees means that we help investors get maximum returns safely – so no one loses their shirt. Our mission is to help investors reap the benefits of franchise investing with a business model that offers:
- Passive income
Our best-in-class franchise management team ensures that our investors enjoy truly passive income through quarterly distributions without having to manage the franchise. In other words, we do the legwork while you enjoy the returns.
- Flexible capital commitment
We offer investors the opportunity to invest for as little as $500, although our model also appeals to ultra-high-net-worth investors. FranShares allows people of all income levels to become fractional franchise owners with the ability to invest the right amount of capital for their own personal circumstances.
- High-yield diversification
Franchises are real assets with little or no correlation to the overall stock market; thus, they act as a hedge against inflation and are not subject to the same level of volatility. Moreover, our fractionalized ownership approach allows investors to fully diversify their franchise holdings. Owning a portfolio of franchises across different geographies and industries creates an effective buffer against challenges that may shut down a single franchise or location, such as service franchises closing temporarily during pandemic lockdowns.
- Low risk
To minimize volatility and give our investors peace of mind, FranShares only invests in recession-resistant franchises with a track record of success. We perform all due diligence and thoroughly vet each franchise partner for strong brand recognition and market positioning.
As previously mentioned, the franchise industry is regulated by the FTC; and as a registered investment vehicle, FranShares is also regulated by the SEC. The FTC requires full disclosure of each franchisee’s background, financials, and performance. In addition, we provide our investors with reporting and regulatory compliance documentation above and beyond what federal regulators require.
Get started with FranShares
If you’re an investor who is looking to incorporate franchises into your portfolio, investing fractionally with FranShares offers high earning potential and diversification in a completely passive investment model. To learn more about FranShares and this unique opportunity, speak to our Investor Relations team.