Diversify for growth - An Elkstone guide to private market investments
Unlock your portfolio’s true potential
Against a backdrop of economic policy uncertainty and the over-saturation of traditional markets, a new frontier is emerging: alternative investments. Whether you’re a seasoned financial veteran or a curious newcomer, understanding this landscape could be the key to powering up your portfolio.
These investment opportunities could include backing high potential start-ups or renewable energy projects, for example, or broadening your portfolio to include commodities or hedge funds.
If you want to create a diversified, resilient portfolio better able to weather economic storms than traditional portfolios, it may be time to go beyond stocks and bonds.
Be open to significant upside
Depending on your available capital, time horizon, need for liquidity, appetite for risk and existing investments, alternative investments could be a smart choice for you.
While they come with their challenges and risks, they also offer you strong potential for enhanced returns and true portfolio diversification.
As Ireland’s leading experts in the field, we’re here to guide you as you assess if alternative investments are right for you, to suggest how you might get started, and to unlock the door into this rewarding investment universe.
Welcome to a new era of investing—where creativity meets capital, and the possibilities are vast.
1. The rising tide of alternative investments
As traditional investment avenues become increasingly crowded and unpredictable, alternative investments offer opportunities to those willing to venture beyond conventional strategies.
Rewarding growth set to continue
Alternative investments have experienced remarkable growth in recent years, with no signs of slowing down. According to a report by Preqin, the global alternative assets under management reached US$13.32 trillion in 2021.[1]
Projections suggest it could surpass US$23 trillion by 2027. That would represent a compound annual growth rate of 9.3% since 2021, significantly outpacing traditional investment markets.[2]
This global trend is mirrored in Ireland's burgeoning alternative investment sector. According to Irish Funds, the local industry body for the funds industry, the country's alternative investment fund assets reached €906 billion as of March 2024. That represents a sizable portion of the €4.5 trillion total assets under administration in Irish-domiciled funds.[3]
What’s driving the growth of alternative investments?
The rapid growth of alternative investments in Ireland is not a coincidence but the result of a perfect storm of factors that have positioned the country as a prime destination for innovative financial strategies. Key drivers fuelling this growth include:
Outperformance
Alternative investments can generate higher returns their public market peers. This may become even more attractive against a backdrop of rising interest rates and bond yields. For example, private equity and venture capital can offer significant returns, albeit with higher risk.
Diversification
As markets become more interconnected, the value of true diversification has never been higher. Alternative assets often have low correlation with traditional stocks and bonds. That offers you protection against market volatility.
Technological advancements
Improved data analytics and financial technology have made alternative investments more accessible and transparent to a broader range of investors.
Changing investor demographics
Younger, tech-savvy investors are more open to non-traditional investment options–they’re driving demand for innovative financial products.
A favourable regulatory environment
Ireland's stable and robust regulatory framework, aligned with EU directives, has made it an attractive domicile for alternative investment funds.
Post-Brexit opportunities
With the UK's exit from the EU, Ireland has emerged as a preferred location for fund managers seeking access to European markets.
What returns can you expect from alternative investments?
While the allure of alternative investments often lies in their potential for outsized returns, it’s crucial to understand performance can vary widely across different asset classes and strategies.
Real estate: still offering steady growth
From purpose-built student accommodation to high-end office spaces in Dublin's Silicon Docks, real estate offer investors a tangible stake in Ireland's economic growth story.
The Irish property market has shown resilience and potential for strong returns due to a lack of properties, compounded by a booming economy, tough planning laws, a high property vacancy rate, and a record-breaking population growth.
In 2023, Ireland's population increased by 3.5%, according to the European Commission data.[4] That’s not only the largest increase on record, but one of the highest ever recorded for a single country. [5] This boom continues to drive up asset prices and rental yields. Prime industrial yields were around 4.75% for best-in-class stock in Q2 2024, [6] while office yields hit 5%.[7]
Private equity: diverse opportunities to back business
Private equity simply means providing capital to private companies not listed on stock markets. Returns can vary significantly depending on the sector, the specific funds and market conditions.
In 2023, private equity returns globally, including in Ireland, were under pressure due to higher interest rates and inflation. Despite these challenges, Ireland's private equity landscape remains dynamic. Our status as a European tech hub and our strong tradition of entrepreneurship continue to create compelling opportunities for private equity investors.
From early-stage startups to mature businesses seeking growth capital, the private equity sector in Ireland offers diverse investment possibilities.
Venture capital: high risk, high reward
Venture capital is capital invested in a project with a substantial element of risk, typically a new or expanding business. Ireland's thriving tech sector has created numerous opportunities for venture capital investment. In 2023, Irish tech SMEs raised a record €1.35 billion in VC funding, according to the Irish Venture Capital Association.[8]
This record-breaking figure is a testament to the vibrancy of Ireland's startup ecosystem. Irish startups are attracting attention and capital from investors worldwide, from fintech disruptors to innovative biotech firms.
Four steps to get started
While these trends paint an appealing picture, it’s important to approach alternative investments in a structured way, taking a balanced perspective.
1. Conduct thorough due diligence
Research the track record of fund managers, investment strategies, and historical performance within the Irish market.
2. Understand local market dynamics
Familiarise yourself with Ireland's economic trends, regulatory environment, and sector-specific opportunities.
3. Consider tax implications
Work with tax advisors who understand the nuances of Irish tax law regarding alternative investments.
4. Make the most of local expertise:
Partner with firms with deep knowledge of the Irish alternative investments landscape and provide tailored advice.
2. Understanding alternative investments
Alternative investments encompass many assets and strategies outside traditional stocks, bonds, and cash. At Elkstone, we have developed a five-pillar approach[1] that provides a comprehensive overview of the alternative investment universe:
Private equity (growth pillar): This includes investments in private companies at various stages, from early-stage venture capital to late-stage buyout.
Private credit (defensive pillar): This involves lending to private companies and projects, including corporate lending, asset-backed lending and niche alternative lending.
Real assets (stabilization pillar): This covers investments in physical assets such as real estate, infrastructure, and farmland or forestry.
Hedge funds (uncorrelated pillar): This includes strategies driven by different inputs than those across the first three pillars, often expressed using hedge fund structures.
Liquid alternatives (public pillar): This encompasses markets and strategies such as gold, commodities, cryptocurrencies and CTA strategies including trend-following.
This framework can help inform your decisions as you build a balanced portfolio that makes the most of the unique characteristics of each pillar.
While private equity might offer high growth potential, real assets can provide stability and protect against inflation. Similarly, hedge funds and liquid alternatives can offer valuable diversification benefits, especially during market turbulence.
Know the dominant investment categories
Popular categories in Ireland reflect both global trends and the distinctive characteristics of the Irish economy.
Private equity and venture capital
The country's success in attracting multinational tech giants like Google, Facebook, and Apple has had a ripple effect, fostering a culture of innovation and entrepreneurship. Its vibrant business ecosystem, particularly in technology and life sciences, has created fertile ground for private equity and venture capital investments.
Ireland’s thriving startup scene, particularly in fintech, biotech, and enterprise software, has birthed unicorns – startups valued at over US$1 billion – such as LetsGetChecked and Soapbox Labs. This success has attracted domestic and international venture capital, and creating a virtuous cycle where successful exits provide capital and expertise for the next generation of startups.
Investing in growing Irish small and medium-sized enterprises (SMEs) through private equity funds can generate significant returns as these companies expand domestically and internationally.
A new cycle of Enterprise Ireland's Seed and Venture Capital Scheme—set to have a record allocation of €250 million over five years—will help buoy the sector further.[1] Over the past 30 years, this scheme has helped Enterprise Ireland become Europe’s largest venture capital investor. [2]
Commercial and residential real estate
Ireland faces a severe housing shortage, creating opportunities for residential development. Moreover, our status as a European hub for tech and pharmaceutical companies drives demand for high-quality commercial and residential properties. Relevant opportunities include:
Commercial real estate: Office spaces in Dublin and other major cities represent attractive investment opportunities, as do industrial and logistics properties.
Residential property: With the ongoing housing crisis in Ireland, purpose-built student accommodation and build-to-rent developments have emerged as popular real estate investments. They offer offer attractive returns with prime net yields for new properties estimated at 5%.[3]
REITs: Real estate investment trusts provide a way to invest in the property market with greater liquidity than direct property ownership.
Green and sustainable investments
Ireland's commitment to reducing carbon emissions and its natural advantages in renewable energy generation, particularly wind power, make it an attractive destination for green investments.
Moreover, our strong agricultural tradition is being reimagined through the lens of sustainability, creating opportunities in areas such as carbon offsetting and protein production.
Ireland’s position at the forefront of green finance initiatives has created opportunities in:
Renewable energy: Investments in wind farms, solar projects, and other renewable energy infrastructure.
Green bonds: Ireland was one of the first countries to issue sovereign green bonds – a sovereign bond is a debt security issued by a government to make money. Moreover, the market for corporate green bonds is growing.
Sustainable agriculture: Given Ireland's strong agricultural sector, there are opportunities for sustainable farming and agtech investments.
Other alternative investment opportunities:
Aircraft leasing: Ireland is a global hub for aircraft leasing, meaning this sector can offer valuable investment opportunities.
Intellectual property: With many tech and pharmaceutical companies based in Ireland, investors can find opportunities in intellectual property and royalty streams.
Distressed assets: Given economic challenges, distressed debt and turnaround situations may offer opportunities.
3. The case for alternative investments
Let’s explore some of the key benefits alternative investments can offer Irish investors.
Gain invaluable diversification
The traditional 60:40 bond-to-equity mix no longer represents an ideal portfolio, as these assets often move in the same direction. Instead, we advocate for a healthy focus on alternative investments alongside stocks and bonds to achieve true diversification.
One of the primary advantages of alternative investments is their potential to create a balanced portfolio that complements stocks and bonds, offering true diversification and protection across market events without diluting expected returns.
Capture potential for higher returns
Higher return potential is appealing, but it often comes with increased risk. The key is to strike a balance between return seeking and risk management, which is where the expertise of specialised alternative investment firms becomes invaluable.
Finetune how you manage risk
We can’t overstate the role of alternative investments in risk management. With their diverse range of strategies and asset classes, alternative investments offer tools to navigate these challenges and build more resilient portfolios. In the Irish context, this includes:
Brexit impact mitigation: Investments which are less correlated with EU-UK trade dynamics can help mitigate potential negative impacts from ongoing Brexit-related uncertainties.
Inflation protection: With rising inflation in Ireland and the Eurozone, real assets such as property and infrastructure can provide a hedge against eroding purchasing power.
Interest rate risk management: With recent interest rate changes, certain investment strategies can help manage fixed-income portfolio risks.
4. Challenges and considerations: what to watch out for
Private market investments are not a one-size-fits-all option, so know the risks and take time to consider how they’ll fit into your overall investment strategy.
Understand liquidity concerns
No investor wants to be caught in a cash crunch. Bear in mind many alternative investments can be illiquid. While that allows managers to pursue long-term strategies without the pressure of short-term market fluctuations, investors must be willing to commit their capital for long stretches.
It’s essential to have careful financial planning in place before you invest, so be sure to thoroughly understand your own liquidity needs, and to do a liquidity sense check on any proposed investments.
Private equity and venture capital
These investments often have lock-up periods of seven to 10 years or more. That might not suit you if you might need access to capital for other opportunities or expenses. It’s worth noting, however, that newer semi-liquid funds often have much shorter lock-up periods, such as two or three years, and also allow quarterly redemptions.
Property investments
The Irish property market, while generally robust, can experience periods of acute illiquidity. For example, during the 2008 financial crisis, many investors found it difficult to exit property investments.
UCITS funds versus non-UCITS funds
While UCITS funds (a type of open-ended investment fund) offer greater liquidity, they can’t pursue certain strategies as effectively as non-UCITS funds, which typically have stricter liquidity terms.
Be mindful of complexity and fees
Private investments often involve complex structures, fee arrangements, tax implications and risk assessments. The complexity of alternative investments underscores the importance of working with experienced advisors and conducting thorough due diligence.
Fee structures
While higher fees can be justified by superior performance, you must carefully evaluate whether the potential returns justify the costs. Understanding how fees are structured and their impact on overall returns is also crucial.
Management fees are often higher than traditional investments. They typically run from 1% to 2% annually. Performance fees are common in hedge funds and private equity. They’re often set at around 20% of profits above a certain threshold.
Other expenses may include fund administration, legal and audit fees, which can be higher for Irish-domiciled funds due to regulatory requirements.
Be ready for tax implications
Navigating the regulatory and tax landscape for alternative investments demands specialised expertise. While Ireland's regulatory environment is generally favourable for alternative investments, compliance requirements can be complex. Meanwhile, international investments may expose investors to other tax concerns. Be sure to allow for careful planning, ongoing management and professional tax advice to manage tax considerations.
Conduct risk assessment and due diligence
To assess risk, it’s important to have (or to have access to) a nuanced understanding of both the specific investment strategy and the broader economic context. Potential risks to consider include:
Limited track records
Many alternative investments, especially in newer strategies or with emerging managers, may have limited performance history.
Market size
The relatively small size of the Irish market can affect the scalability and exit strategies of some alternative investments, particularly private equity.
Concentration risk
Given the Irish economy's focus on certain sectors, such as tech and pharma, some alternative investment opportunities may have concentrated exposure to these areas.
Smart money looks to alternative investments
As Ireland's financial landscape continues to evolve, alternative investments are no longer just a niche option for the ultra-wealthy – they're an essential consideration for mass affluent investors.
As you chart your financial course, consider how alternative investments might fit into your strategy, whether you're looking to dip your toes in with a small allocation or dive deeper with the guidance of an experienced firm like Elkstone, the world of alternative investments awaits.
Elkstone is Ireland’s alternatives investment specialist specialising in private markets. We offer our clients a gateway to diversified wealth expansion through unique access to global and local investment opportunities, specialising in non-traditional market investments such as real estate, venture, private equity, private credit and global hedge funds.
Contact Elkstone today for a consultation tailored to your needs and investor profile.
[2] as 1
[3] Irish Funds Industry Association, 2024
[11] As 11
Contact Elkstone today to explore alternative investment opportunities.
Warning: Past performance is not a reliable guide to future performance.
Warning: Benefits may be affected by changes in currency exchange rates.
Warning: The value of your investment may go down as well as up.
Warning: If you invest in these funds you may lose some or all of the money you invest.
Elkstone Private Advisors Limited (trading as Elkstone, Elkstone Wealth, Elkstone Private and Elkstone Ventures) is regulated by the Central Bank of Ireland.
Warning: This is a marketing communication. This document is not a contractually binding document and has been prepared for information purposes only. It is not intended as and does not constitute a personal recommendation. Please do not base any final investment decision on this.