Alternative Investment Features, Methods, and Structures

Fund investment involves investors contributing capital to a fund, which then makes investments on their behalf. This method is characterized by indirect investment through a fund manager, who charges management and performance fees. It is typically suited for investors with limited resources or experience.

Co-investment allows investors to invest alongside a fund in specific deals, providing more control over investments and potentially lower fees compared to fund-only investing. It is a step towards more direct involvement in investments, suitable for investors with some experience and resources.

Direct investment involves investors making investments directly into companies or projects without intermediary fund managers. This method offers maximum control and flexibility, but requires significant resources, expertise, and oversight capabilities. It is suitable for large, sophisticated investors.

Private capital refers to investments in private equity and private debt, where capital is provided outside of public markets. Private equity involves equity stakes in private or public companies that are being taken private, often used in mature or declining firms to restructure and enhance value. Private debt includes loans or bonds not traded publicly.

Real assets are tangible or intangible assets that generate current or future cash flows or serve as a store of value. This category includes real estate, infrastructure, and natural resources like minerals and timber. Real assets can also encompass intangibles such as patents and intellectual property.

Hedge funds are private investment vehicles that employ diverse strategies including leverage, derivatives, and short selling to achieve returns. They are characterized by their flexibility in investment choices and often pursue strategies distinct from traditional asset management approaches.

Digital assets include cryptocurrencies, tokens, and digital collectibles. These assets are stored and transmitted electronically, and they encompass a wide range of asset types including utility tokens, security tokens, and non-fungible tokens (NFTs).

Alternative investments often use limited partnerships to allocate business risk and return, distribute responsibilities, and maximize flexibility. General Partners (GPs) manage the fund with unlimited liability, while Limited Partners (LPs) provide capital and have limited liability, capped at their investment amount.

To align the interests of GPs and LPs, alternative investments employ complex compensation structures. These include management fees based on committed capital and performance fees with hurdle rates. Modifications like catch-up clauses and clawback provisions adjust the distribution of returns based on performance.

Alternative investments may use deal-by-deal or whole-of-fund waterfall structures to distribute returns. Deal-by-deal waterfalls allow GPs to collect performance fees per deal, which can be advantageous for them. Whole-of-fund waterfalls require all profits to be distributed to LPs first, aligning more with LP interests.