• Terry Herr, CFP®, CLU

Understanding the Key Milestones for Non-Traded Alternatives

You can make more informed decisions about non-traded alternatives—and avoid surprises—by understanding key stages in advance.

For investors, knowledge is power. As an investor, you probably understand the basics about investments like stocks and bonds. you probably understand what “buy and hold” means, and why market timing is almost always a bad idea. But for other asset categories, like non-traded alternatives, you may need to understand more about the typical lifespan and key milestones of a particular investment.

This is particularly true given that some non-traded alternatives are long-term investments with limited liquidity. After all, the more informed you are, the less likely you’ll be surprised by changes in the investment over time.

Broadly, non-traded alts have life cycles that span multiple years, with three distinct stages that make up a clear beginning, middle, and end.

Phase 1: Raising capital (1-3 years).

This initial period is when investors first makes the decision to invest. At this point in the process, the investment program is focused on buying and managing assets that line up with its investment strategy. Depending on the area of focus, the company may be acquiring private companies, real estate or other assets.

At this stage, your focus should be on the investment strategy and how the particular asset could fit into your portfolio. It’s also critical to understand the long-term nature of the asset, which key milestones are coming, and approximately when these milestones are likely to occur. (Of course, you’ll want to revisit each of those milestones as they get closer.)

You’ll also need to review the ‘nuts-and-bolts’ aspects of the investment. For example, initial statements may show your investment value net of any front-load fees that may apply. You want to understand that distributions may occur in the form of cash, stock or a combination of the two, or perhaps not at all depending on how the investment is structured. You’ll also need to understand that distributions are not guaranteed and may not always be covered by the investment’s performance, especially during the early stages while assets are being acquired. Distributions or a portion may even come from principal as the portfolio is building.

Phase 2: Managing the portfolio (2-3 years).

Once the investment has raised enough capital and is closed to new investors, the company shifts gears to start managing the portfolio of assets. Depending on various factors, cash distributions typically continue during this phase. However, it’s not uncommon for share distributions to end. This typically occurs because the investment program is no longer taking on new investors or making new investments through a distribution reinvestment plan (DRP). Essentially, new shares would result in slicing the same sized pie into more and more pieces.

Also, the actual lifespan of the investment may change. In some cases, the company’s board of directors may decide to shorten or extend the offering, which will affect the length of investment and the period during which liquidity is limited.

Phase 3: Exiting the investment (1-2 years).

During the third stage, the company works with investment banks to sort through options for an exit strategy, which include listing the investment publicly or liquidating it. If it has not occurred in the previous phase, all distributions, DRP and SRP, typically end during this period primarily because managers want the portfolio’s capital to be fully invested in an effort to maximize its value and minimize any cash-management requirements. This is the time when management looks to enact the details of its exit strategy. If a liquidation occurs, assets may be sold as a portfolio or in a piecemeal fashion in an effort to maximize returns. Any potential proceeds may be distributed as one-off special distributions or all at once when the liquidation is complete. Public listings increase shareholder liquidity and will provide a new prospectus that may outline future plans for distributions.

Non-traded alternative investments offer unique opportunities and challenges for investors. We encourage you to ask us how they may fit into your portfolio.

Content was derived from material under copyright fofm CNL Securities Corporation. ©2019 CNL Securities Corp. I Used with permission.

This document is provided by Herr Capital Management, LLC is educational in nature, is not individualized, and is not intended to serve as the primary basis for your investment, financial or tax-planning decisions.

Herr Capital Management, LLC - Where Prosperity Begins © 312-697-1600 Securities offered through American Portfolios Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Herr Capital Management, LLC, a registered investment advisor independent of American Portfolios Financial Services, Inc. Investment products are not FDIC insured and involve investment risk including the loss of principal invested. Please consult your tax consultant for tax advice.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2017 Used with permission.

Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc.(APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.


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Securities offered through American Portfolios Financial Services, Inc. Member FINRA/SIPC.  Investment advisory services offered through Herr Capital Management, LLC, a registered investment advisor independent of American Portfolios Financial Services, Inc.