How to Evaluate Alternative Investment Opportunities in India

• Evaluating alternative investment opportunities in India frequently necessitates a more specialist approach than examining conventional investments.
• In general, alternatives do not act in the same manner as stocks, bonds, or cash do. And each sort of alternative investment necessitates a different level of due diligence on the part of the prospective investor.
• Fortunately, when individually researching an investment opportunity, asking a few smart questions may help you get a long way through the review process.
• Among other things, the following are six crucial questions that an investor should consider asking while analyzing an offering on alternative investment platforms or any alternative investments in India.

How to Evaluate Alternative Investment Opportunities?

Here are six critical questions to ask when evaluating alternative investments.

1. What are the alternative investment’s underlying assets?

It is critical to identify the underlying assets. It discusses the risks and returns that an investor could expect. It also considers if the investment can create diversification within an investor’s portfolio. Assets that create or retain value in a range of conditions are less risky Investors should also consider how underlying assets may or may not contribute to portfolio diversification. 

What to do? 

• Determine how the underlying assets of an investment may create cash flows or drive future value.
• Consider situations in which such assets may become more or less valuable or susceptible.
• Consider how similar or dissimilar such assets are to the remainder of your portfolio. Diverse assets lead to increased diversification.

2. What is the alternative investment’s goal yield or interest rate?

It is crucial for investors to examine the target yield of an investment, which is the predicted percentage of principal repaid on your initial investment. Yield is applicable to equity and debt assets, although it normally accounts for a significantly bigger amount of profits in debt investments.

What to do?

•  Calculate a standardized target yield metric, such as the internal rate of return, to account for the timing of interest payments.
• Analyze the risks that may influence whether the goal yield is relatively high or relatively low in terms of risks alone. It should be noted that goal yields are also influenced by other factors.
• Compare alternative investment goal yields to standard investment target yields to gain a feel of the possible risk or reward.

3. When should you expect to get paid from the alternative investment?

Private debt investments, as opposed to typical investments, are more tailored to the individual circumstances of the lender and borrower of the underlying loan. This implies that you may need to conduct further study to become acquainted with a given loan’s unique structure and cash flow schedule. 

What to do?

• Recognize that there are several ways to organize an offering with respect to the payment schedule and frequency.
• Examine payment structures and payment timing to learn when and how you should expect to get paid.
• Understand the additional risks associated with each investment.

4. What is the alternative investment’s liquidity?

Alternative investments with high liquidity include commodities and currencies. However, private loan investments often have lower liquidity. Investors in illiquid assets sometimes have the possibility to earn larger returns than investors in more liquid assets. They must analyze how their own financial needs may influence their investment selections. Reduced liquidity also prohibit investors from accessing their funds until the end of the investment period. 

What to do?

• Evaluate if the investment’s lower liquidity is warranted by its target rate of return.
• Compare the estimated payment timeline and investment risks to any anticipated liquidity demands as an investor.

5. Where does the underlying loan of the alternative investment fall in the capital stack?

The capital stack is also known as capital structure. It is the order of different types of lenders in a loan in terms of payment and lien priority. Top-tier lenders are more senior, and they can anticipate being paid before lower-tier investors. The risk of loss increases when a lender’s position in the capital stack decreases. For example, if an investment’s underlying loan becomes impaired, lenders higher in the stack will have precedence and a larger claim to be paid back before those lower in the stack, who are more likely to incur losses first. 

What to do?

• Evaluate the underlying loan’s payment and lien seniority by determining how much capital has priority over the lender and gauging how the capital stack influences your risk level.

6. What are the possible risks of the alternative investment?

Investors in private debt analyze risks in terms of defaults and irreversible impairments. A default happens when a borrower violates a loan arrangement, such as failing to make an interest payment on time. A permanent impairment occurs when a debt suffers a loss that cannot be restored.

Investors can also utilize the underlying loan’s loan-to-value ratio to determine how significant the risks of default or impairment are. 

What to do?

• Consider the LTV as well as the conditions and track record of the originator and borrower.
• Determine the expected value of the investment in an undesirable event by getting a clear idea of how similar assets/collateral have performed in the past.
• Examine the investment’s diversification—exposure to a wider range of assets may assist minimize the investment’s concentration risk.

Bottom Line

Investors in alternatives should thoroughly assess the risks associated with each investment they are contemplating. They should also have a solid grasp of the underlying assets, yield, payment schedule, liquidity, position in the capital stack, and potential dangers, among other considerations. Assetmonk is one of the best alternative investment platforms. It can help you go to the next level with alternative investments across several real estate asset types.

Assetmonk gives you access to alternative assets that were previously exclusively available to institutions and the ultra-wealthy. By developing a new investment portfolio, we intend to make financial products more inclusive. Hit us up!

FAQs

Q1. How do you evaluate alternative investments?

A. Some of the steps to evaluate alternative investments are:

• Determine how the underlying assets of an investment may create cash flows or drive future value.
• Consider situations in which such assets may become more or less valuable or susceptible.
• Consider how similar or dissimilar such assets are to the remainder of your portfolio.

Q2. What are the four criteria that are used to evaluate alternative investments economically?

A. The four criteria used to evaluate alternative investments economically are the internal rate of return, the benefit-cost ratio, the pay-back period, and the debt service coverage ratio

Q3. Is Gold an alternative investment?

A. Yes, gold is an alternative investment. 

Q4. Are alternative investments the future?

A. Alternatives are predicted to provide 50% of industry income during the next several years.

Q5. Why choose alternative investments?

A. Alternatives depend fewer on broad market trends and more on the quality of each single investment; hence, adding alternatives has the ability to lessen a portfolio’s total risk. Alternatives can be a good method to diversify your portfolio because they have a low connection to established asset types.