How can private market investments potentially hedge against inflation?
Every investor is facing the same challenge against the backdrop of inflation at levels we haven’t seen since the 1980s. Enter private market investments – whose unique characteristics may help inventors hedge against – and potentially benefit from – inflation.
Rising prices and rampant inflation can devastate your purchasing power, especially if you have large sums of cash sitting on the sideline, waiting to earn. Investors should remain proactive, and consider investment hedges when building their investment portfolio. Inflation, even when coupled with the market volatility that equity markets have experienced in 2022, can make things difficult for investors. Afraid of losing their principal, they’re fearful of seeing their balance decline, while also worrying that if they’re cash sits in their account, their purchasing power will vanish as the cost of living increases.
Inflation hedges however, can be an important consideration when building your portfolio. With no signs of inflationary trends subsiding, consider the following characteristics of private market investments that may help your portfolio.
Real Assets Also Increase in Value
Equity ownership of real tangible assets in times of heightened inflation helps to protect purchasing power because their valuations typically increase during these periods.
Leased Assets
The ability to renew leases more frequently allows management to match rent with market conditions, further boosting the income generated by the asset in a rising rate environment.This can also ensure that the investment won’t fall behind or under-earn.
Private Market Investing 101, with Kal Penn
Fixed rate debt financing
Assets acquired with fixed rate debt at a low interest rate are expected to fare well during times of high inflation because the debt expense incurred by the owner will not rise as rates rise.
Supply and demand imbalances
An equity investment in an asset that is in short supply will naturally face increased demand pressures forcing its price upward, helping to combat the impact of inflation on investors portfolios.
Investment term
Short-term fixed rate debt investments offer another way to potentially offset the impact of inflation. You’re not locked in at a given yield for more than a few months, which provides the flexibility to reinvest proceeds in a short amount of time at a new higher yield if rates increase.
Outsized returns
Over the past 15 years, private equity has marked 14% annualized returns, while the S&P 500 posted 9.3%.1 Annualized returns of 14% over the past 15 years has significantly outpaced the rate of inflation, demonstrating how private market investments can help during current market conditions.
1 All investments involve risk, including the possible loss of capital. There can be no assurance that any product or strategy described herein will achieve any targets or that there will be any return of capital. Past performance is not a guarantee or reliable indicator of future results. Current performance may be lower or higher than the past performance data quoted. Any historical returns, expected or target returns are hypothetical in nature and may not reflect actual future performance. All performance and/or targets contained herein are subject to revision by Yieldstreet and are provided solely as a guide to current expectations.
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2 Represents an average net realized internal rate of return (IRR) with respect to all matured investments in your portfolio, utilizing the effective dates and amounts to and from the investments and net of management fees and all other expenses charged to the investments. Past performance is not a reliable indicator of future results and should not be relied upon as the basis for making an investment decision. All securities involve risk and may result in significant losses, including the loss of principal invested.[read more]