Alternative Investments Overview

Most of the alternative investment opportunities offered through Ziegler are structured as private equity, limited partnerships or non-traded public investments. This section will provide a brief overview to help investors learn more about these types of alternative investments.

Private Equity

Let’s start by taking a look at a case study. A young entrepreneur – John Smith – has an idea and wants to turn it into a business he calls Imagination Company. He talks his parents into letting him use their garage and kick in a few thousand dollars to help get Imagination Company off of the ground. John and his parents are the founding investors of Imagination Company.

Soon, Imagination Company outgrows John’s parents’ garage and John needs to find a bigger space. The problem is, Imagination Company isn’t profitable yet and neither John nor his parents can afford to commit any more of their savings to the company. It turns out, that a wealthy business owner in John’s town hears about Imagination Company and is intrigued by its potential. This investor, Mr. Greene decides to invest some of his own money into Imagination Company, making him an angel investor.

As Imagination Company continues to gain traction, John receives financing for Imagination Company from a venture capital group, and then finally he receives mezzanine financing. Mezzanine financing is typically a hybrid of debt and equity financing that is used to finance existing companies who have already demonstrated their business model. Mezzanine financing typically gives the lender the rights to convert to ownership or equity interest in the company if the loan is not paid back in time and in full. Because mezzanine financing is still used by companies typically before they will qualify for a bank loan, the lender will seek a relatively high rate of return, often around 20%.

As you can see from this chart, as the company matures and becomes a less risky investment, it becomes more expensive to invest in the company and investors who invest in the infant stages of a company will expect much higher returns for taking on more risk than those investors that invest well into the life of the company.

Most of the private equity opportunities offered through Ziegler are considered to be venture capital or mezzanine financing. Typically, private equity alternative investments are structured in the form of pooled funds. A fund manager pools together the funds of qualified investors to invest for a specific strategy, or in a particular market such as health care real estate. Because the manager is pooling funds of many investors, he/she is able to invest in a portfolio of different companies, in an effort to mitigate the risk.

What if, after receiving funds from the venture capital group, John would have hit a roadblock, and Imagination Company would have gone out of business? John and his parents, Mr. Greene, the angel investor, and the venture capital group, all would have experienced significant, if not complete loss of their investment into Imagination Company. However, what if one were to invest into fund that provides financing to a portfolio of 10 different companies similar to Imagination Company? Through this diversification of funds, an investor may be able to sustain a complete loss in a few of the companies and still experience a substantial overall return on the initial investment.

Limited Partnerships

Limited partnerships are entities that are structured with two levels of investment – general partners and limited partners. General partners are responsible for day-to-day management of the partnership and are responsible for all legal debts, obligations, claims, and potential lawsuits against the partnership.

The limited partners have no input into the management of the partnership. A limited partner makes an initial investment into the partnership and is compensated by a full return of capital plus a pre-stated share of the partnership's profits. A limited partner is liable only to the extent of the original investment into the partnership.

In a limited partnership alternative investment, the investors are limited partners and the fund has general partners that oversee the management and take on the additional liabilities.

Non-traded Public Investments

A non-traded public investment (typically a Real Estate Investment Trust, or REIT) is considered a public company that registers with the SEC and files quarterly reports, however they do not have shares that are traded on public stock exchanges. Non-traded public investments typically have an external management and advisory team.

Non-traded public investments typically have a minimum holding period for investors. Investor exit strategies are generally linked to a required liquidation after some period of time (often 10 years), or the listing of the stock on a national stock exchange at some time in the future.

Alternative investments are not appropriate for all investors, and carry specific risks above and beyond those associated with traditional asset classes.

There is no assurance that alternative investments will outperform traditional investments, or that investing in alternatives will be profitable. Alternative investments are sold to qualified investors only by a Confidential Offering Memorandum or Prospectus. There are minimum eligibility requirements for U.S. Investors. Contact your Ziegler financial advisor to find out if you are eligible.