How to Secure Higher Returns in Exchange for a Little Less Liquidity, Not Increased Risk

Jeffrey Sweeney, Chairman and CEO at US Capital Partners, shares the firm’s unique investment perspective on “investment-grade” credit alternatives.

The current economic landscape is marked by long-term low returns, negative interest rates, and increased market volatility. In this landscape, focusing on best practices in credit alternatives has the potential to deliver higher returns in exchange for a little less liquidity, not increased risk.

Sharp Growth in Alternative Securities

We have been witnessing an explosion in private investment capital. As more money has accumulated in private-equity firms and sovereign-wealth funds, companies are tapping them for capital and delaying going public, sometimes delivering sizable early investment gains to private rather than public investors.

WSJ Chart

Defining Risk Factors of Alternatives

There is often a misconception that alternatives are inherently risky. This is usually the result of a failure to differentiate between different kinds of alternatives. At US Capital Partners, we distinguish between “investment-grade” and “non-investment-grade” alternatives.

Investment-grade credit alternatives, for example, typically have the following characteristics:
• Performing companies with mature products and services
• Strong, competitive position in their industry with diversified customer base
• Debt service cash-flow coverage and asset coverage as a secondary form of repayment

By contrast, non-investment-grade credit alternatives have the following features:
• Angel round, venture round, or seed round
• No substantive product sales or market penetration
• Regulatory uncertainty and other significant risks
• Lack of debt service coverage and only asset-backed sale for repayment

Some Benefits of Investment-Grade Credit Alternatives

Investment-grade credit alternatives combine low principal volatility with superior, risk-adjusted net returns of 6–15%. They also usually offer distributable realized interest income. While non-investment-grade credit alternatives have the potential for higher returns, they also have a far higher risk profile.

Focus on Best Practices in Credit Alternatives

To achieve optimal results, US Capital Partners focuses on investment-grade credit alternatives, applying the following best practices:
1. Allocate 15-20% of one's investable assets to investment-grade alternatives to boost total AUM returns by several hundred basis points annually.
2. Do careful due diligence on the fund manager or use only broker-dealer underwritten securities or fund placement agents.
3. Mitigate the risk of size through diversification, collateral management, and careful oversight.
4. For more widely diversified portfolio risk, use funds and experienced fund managers.

To learn more about US Capital Partners, email Jeffrey Sweeney, Chairman and CEO, at jsweeney@uscapitalpartners.net or call (415) 889-1010.

This short article shares US Capital Partners' opinions and best practices at the firm, and should not be regarded as financial advice or a recommendation to invest in any particular security or class of securities. This article is not a solicitation to buy or an offer to sell any security and may not be relied upon in connection with the purchase or sale of any security. The contents of this article have been compiled using original and published sources believed to be reliable, but are not guaranteed as to accuracy or completeness. Any investment in securities involves significant risk, including the loss of principal. As such, investors should seek investment advice from a registered investment adviser before investing. Investment advice by US Capital Partners is provided by affiliated firm US Capital Wealth Management, LLC, a registered investment adviser.

Jeffrey Sweeney