Individual and corporate investors who wish to boost their investment returns and enhance the diversification of their portfolios are increasingly turning to alternative investments as a viable means to achieve these goals. If you’re a private investor seeking opportunities for alternative investment in Nigeria, here’s a brief highlight on what you need to know before you begin.
What are Alternative Investments?
Alternative investments refer to any financial asset that is outside the conventional categories of stocks, bonds, and cash. The assets include private equity, venture capital, hedge funds, commodities, and real estate. Alternative investments give investors additional sources of return and are characterised by being more complex and less frequently traded than public stocks and bonds.
4 Major Types of Alternative Investments in Nigeria
1. Private Equity
Private equity is an investment partnership mostly involving institutional investors and wealthy individuals who buy shares or ownership stakes in private companies that are not listed on the stock exchange for public trading. Subsets of private equity include:
- Venture capital – This focuses on startups in their early stages
- Growth equity – Invests in stable companies to restructure or help them expand.
- Buyouts – An equity that invests in purchasing public companies to make them private.
2. Private Credit
Private credit is an asset type that involves lending to businesses by non-bank institutions with interest to be paid throughout the loan period and a return of the principal sum to be made at the end. Unlike private equity, a private credit investor does not own all or part of the company but can impose certain obligations on the borrower as agreed in the loan covenant.
3. Hedge Funds
Hedge funds are an exclusive pool of funds used to trade in short-term relatively liquid assets by employing various investment strategies to maximise returns. Hedge funds usually include funds such as endowments, pension funds, mutual funds, and high-net-worth individuals.
4. Real Estate
Real estate investments involve the purchase, management, sale or rental of real estate properties like land, building, and residential apartment. While real estate as an alternative investment is quite different from newer alternative assets, it is the least risky and can generate recurring cash flow in form of rent with higher yields due to the high appreciation rate of real estate properties.
Who Should Consider Alternative Investment in Nigeria?
Wondering if the alternative investment is right for you, here are five things to consider before making a decision:
- Liquidity Needs – Alternative investments can be illiquid and may require you to lock up funds for 10 years or more.
- Investment Goals – Alternative investments can be a great option if your goal is to enhance the diversification of your portfolio.
- Risk Appetite – Alternative investments involve moderate to high levels of risk and may not be appropriate for you if you wish to have more secure investments.
Benefits of Alternative Investments in Nigeria
While alternative investments may be discouraging to some due to their illiquidity and long-term commitment, here are significant benefits this asset class holds for investors:
- Lower volatility – As performance is tied directly to the performance of the company in the case of Private Equity or Private Credit, alternative investments are not influenced by unpredictable swings in the public market.
- Diversification & Enhanced Income – Alternative investments allow you to tap into another income stream outside of the traditional asset market, broadening your earnings potential.
- Ownership – With alternative investment types like private equity, your investment gives your direct influence on the company you are backing, allowing you to be involved in businesses and sectors you are passionate about.
FBNQuest – Your Trusted Partner for Alternative Investment in Nigeria
FBNQuest is a leading alternative investment management company in Nigeria. Since our establishment in 2003, we have invested over N20 billion in more than 70 private companies through private Equity and Venture Capital funds. We leverage our unique market research capabilities in our approach to investing in private companies ad work closely with our clients to deliver solutions fit for their specific risk tolerance boundaries and overall portfolio objectives.
Visit fbnquest.com/our-solutions/investment-management/ to learn more about our investment solutions.