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In this episode, attorneys Roland Wiederaenders and Sarah Florer delve into the world of private securities and their significance in the world of alternative assets. They stress the importance of defining terms to ensure a comprehensive understanding of private securities and explain that private securities are investments in alternative assets that differ from traditional publicly registered securities. They clearly contrast between private and public securities, each with its registration requirements and ongoing disclosure obligations. This comparison aims to enlighten the audience about the intricacies of this part of the financial world. They also explore the benefits of private securities, such as the potential for small businesses to raise capital and the opportunity for mission-driven investments.
Keywords
alternative assets, private securities, investment advisor, asset allocation, diversification, private equity, hedge funds, commercial real estate, modern portfolio theory, securities, alternative assets, shares of stock, membership interests, limited liability company, investment contract, common enterprise, expectation of profit, entrepreneurial efforts, managerial efforts, democratization of capital, mission-driven investment
Takeaways
- Alternative assets are financial assets that do not fall into conventional investment categories like publicly traded stocks, bonds, or cash.
- Alternative assets include investments in hedge funds, private capital, real estate, natural resources, and infrastructure.
- Private securities, which are associated with alternative assets, have less disclosure, greater complexity, and lower liquidity compared to public securities.
- Alternative assets provide opportunities for mission-driven investments and the democratization of capital.
- Viewers are encouraged to learn more about alternative assets and engage with their financial advisors.
Sound Bites
- "Introduction to Alternative Assets"
- "The Three Main Classes of Alternative Assets"
- "Asset Allocation and Diversification in Alternative Asset Investing"
- "That's like the stock market investing in a share of stock."
- "What you buy, you don't buy a share of stock, you buy membership interest."
- "Was there an investment in a common enterprise?"
Chapters
00:00 Introduction to Alternative Assets
05:06 The Three Main Classes of Alternative Assets
09:24 Asset Allocation and Diversification in Alternative Asset Investing
26:39 Understanding Securities and Alternative Assets
29:25 The Definition of a Security: Elements and Importance
31:51 Democratization of Capital: Investing in Alternative Assets
36:35 Aligning Values and Creating Value with Alternative Investments
39:30 Diversifying Investment Portfolios with Alternative Assets
Credits
Sponsored by
Real Advisers, Austin, Texas
Real Advisers, Austin, Texas
Special thanks to:
Please visit us: AltInvestingMadeEasy.com
Please contact us: info@AltIvestingMadeEasy.com
Roland Wiederanders: Roland@grablemartin.com
Sarah Florer: sflorer@grablemartin.com
Disclaimer: “This production is for educational purposes only and is not intended as investment or legal advice.”
© 2024 AltInvestingMade Easy.com LLC All rights reserved
Creators & Guests
Host
Roland Wiederaenders
Co-founder of the Alt Investing Made Easy podcast, investment advisor, and corporate securities attorney with expertise in private investment funds, corporate/securities issues, mergers and acquisitions, partnership structuring, and federal income tax matters. Roland is also a member of Grable Martin PLLC.
Host
What is Alt Investing Made Easy?
Join attorneys Sarah Florer and Roland Roland Wiederaenders as they navigate through the maze of market jargon and reveal the secrets of diversifying your portfolio. Whether you're a seasoned investor or taking your first step toward financial freedom, we empower you with the knowledge and insights you need to thrive in the dynamic landscape of alternative assets. Get ready to transform how you invest, inspiring a new way of thinking about your finances, and discover how to make your money work harder. Dive in with us, and let's make investing in alternative assets easy, giving you the confidence to navigate the financial landscape, one episode at a time.
Roland Wiederaenders (00:00.15)
I'm Roland Wideranders and I've been practicing law in Austin, Texas since the last century. And I'm Sarah Flore. And while I haven't been practicing law in Austin since the last century, I have worked on bigger deals than Roland. Today, we're going to be talking about what alternative assets are. So loosely titled, this episode is called Introduction to Alternative Assets.
Roland Wiederaenders (00:41.198)
I am a 25 year attorney, I practiced in Austin, Texas for almost all my career. You haven't been practicing quite as long, but you're licensed in Texas also and you have some really interesting experiences that we want to bring out.
[Sarah]Well, I went to law school here in Texas like you did, but then I ended up going abroad to work for a long time, 17 years. So my experience is primarily outside of the United States based in Dubai. And during all that time, I became an English solicitor and I worked on all kinds of deals that involved, you know, projects and investments all over Asia, all over Africa, Europe, et cetera. So between us, I guess we cover, basically cover the globe.
[Roland] Yeah, that's right. And the other thing that I would want to bring up is, you know, your, your,strong connections to the Middle East. You have a degree in Middle Eastern Studies and you've lived and traveled in different parts of Asia iandn the Middle East.
[Sarah]Well, I actually didn't finish that degree in Middle Eastern Studies. I do have an MBA, but I have traveled extensively in the Middle East and in Asia. when you live in a place like Dubai, which is a very tiny country compared to anything in Texas, then everything that you do is cross -border. So any transaction, any investment, anything that you're involved in involves people from different places. Maybe the equivalent in the US would be the way we do things across state borders, perhaps. But it does give me a different perspective. My husband is from India. My children were born abroad, and now we're back here assimilating into our own culture. I'm from Texas, many generations.
So it's been a really interesting life so far, but it also is exciting to get to start a big project like this and incorporate all of those experiences into what we're trying to do here.
[Roland] This is something that's really necessary for us to talk about. I for sure, I'm an attorney and my career has sort of been divided equally amongst the different types of alternative assets. And we'll talk about these, I've got...
Roland Wiederaenders (02:54.878)
experience in my law career representing private equity deals, hedge funds, and commercial real estate. And those are really the three main classes of alternative assets. We're going to get into this a little bit more in a second. But the other thing that I would want to bring out is the fact that I'm also a registered investment advisor in Texas. The name of my investment adviseor firm is Real Advisors. Real Advisors is one of the sponsors of this webcast. And the fact of
of my investment advisor registration. And you know, you and I are working on this together. So I'm the actual investment adviseor representative that is the technical term and the licensed person, but we can work on this together. And really what we're trying to do is educate people about alternative assets, give people opportunities to invest in alternative assets. And without that investment adviseor registration titlelittle designation,
We really can't be doing this because there are specific types of people that can make offers of securities on behalf of a third party. because of changes in the law in 2013, the jobs act that was enacted, there's a new exemption from the broker dealer rules that allows investment advisors to create a platform where we're able to give
people opportunities to advertise their private securities deals. So that's one thing that I would really want everybody to know about us and about me in particular is the fact that we're here as really more investment adviseors. We're both attorneys, but we want to be really careful here to note that we're not giving legal advice and we're also not giving investment advice, although we could do both of those things.
[Sarah] Well, and just want to point out for our viewers that it's really unique to have somebody like Roland who has really extensive experience in all these different alternative asset classes. A lot of times attorneys end up specializing in one area or another, and Roland's been able to do all three so far. So in terms of his experience and the knowledge that he has about
Roland Wiederaenders (05:12.492)
not just the legal knowledge, but about the industry as a whole and the history of all of these things that are involved in this, you know, alternative assets that we keep mentioning that we're going to get into defining soon for you, s. So you understand. W, we're really lucky to have somebody like Roland who has that experience. then in addition can actually be aware the hat of investment advisor. This is a pretty unique path and it's really, really special. And we're, just really grateful that we get to share.
your experience rolling with everyone who's watching.
[Roland] It's exciting. And I think that there's going to be a ton of interest in this area. And it's really come about maybe over in the last 30 years, honestly. But I think the thing to note that's so important is that when we talk about alternative assets, what we're really talking about is investments in private securities. And we would contrast private security versus a public security. And
Yyou know, both you and I devote our practices to alternative assets. We help people sell private securities and that's this is something that we need to flesh out. I think it's really important for us to provide some context to people so they really understand. I think that, you know, my goal with this initial episode, the takeaway is anybody that's listening to it. What I would want them to do is go to their financial planner armed with just a little bit of additional information, a little bit of additional understanding. And they could ask their financial planner, hey, tell me about opportunities for me to invest in alternative assets. I listened to two attorneys with their webcast and they were talking about alternative assets and they explained it a little bit. But, you know, watching this episode today, I just want one of our audience members to be able to go to their financial planner and speak a little bit or be able to talk to their financial planner just a little bit, you know, with a little bit more information about what an alternative asset is.
[Sarah] Well, we all have a responsibility in our lives to know as much as we can, especially when it comes to our money and wealth building and those kinds of things, because we have, you know, it's a complicated area in certain ways, but it's also something that's fully understandable by people, you know, so -called lay people.
And so what we want to do today is I think, Roland, you're going to Roland Wiederaenders (07:40.478) start off and you already mentioned private securities versus public securities. So we're going to talk a little bit more about that and then we're going to get into what actually the different alternative asset classes are. And we'll be doing this over a series of a few episodes. So we would really encourage people who are watching to stay tuned for more information because our goal is really to provide information to all of you that is useful to you and that you can retain and use just like Roland's saying, when you go and have your own conversations with the advisors that you rely on in your lives.
[Roland] What is an alternative asset? And Sarah, you researched this kind of a traditional definition to get ready for this. Maybe you could lead us off in giving us the textbook definition.
[Sarah] If you just go to Investopedia,
you can see that alternative assets are broadly defined as financial assets that do not fall into one of the conventional investment categories. That's not enough to really understand what that means. So what is a conventional investment category? Well, those are publicly traded stocks, bonds, or cash. So there we are. It's a catch all for everything that's not publicly traded stocks, bonds, or cash. These include investments in five main categories.
Roland's already mentioned some of them. We have hedge funds, private capital, real estate, natural resources, and infrastructure. Now, arguably, you could consolidate a couple of those, and maybe there are technically three main ones. But what we'll get into is really diving more deeply into what all of those are so that it's easy to remember and makes sense.
[Roland] And again, you know, can't emphasize this enough, but what we're really talking about, apart from maybe direct investments in oil and gas and real estate, we're talking about investments in private securities and again, contrasting those from public securities and unlike public securities, there's far less disclosure in connection with the private securities deals. There's a potential for some greater complexity and Roland Wiederaenders (09:58.998)
a lot less liquidity, but these will be things that we're talking about more and more as we proceed along.
[Sarah] And just to add to that, just like with any investments, obviously there are risks that go along with that. So we're going to also be discussing the various risks and maybe how to address those or how to think about some of that, although not in the context of what you would get directly from your own investment advisor.
[Roland] So, yeah, we want you to learn what an alternative asset is.
what the risks are, how it's different from investing in a publicly traded stock. And the final thing, once we feel like we've given you enough information to start evaluating some of these investment options, we're gonna have guests on here who talk about the investment opportunities that they create. And these guests are our law clients that have helped us to really essentially be their secretaries. They come to us and they want agreements drafted and disclosure documents drafted. They want documents. And of course, that's very important, but all those documents are aimed at one thing. And that's to, they're going to use them to raise money for their business, whatever it is. For a long time, my very best client was an electric motor company. And they went through several rounds of financing and they issued private securities, private equity, to raise money for their business activities. That was a really good experience for me representing somebody that is selling private securities in connection with the technology idea of business. But their ultimate goal was to develop this idea and go off and sell a ton of electric motors and make money that way for their investors. And a hedge fund is very similar to a...Like a mutual fund. I most people understand what a mutual fund is. It's a diversified portfolio made up of public equities, typically, that, you know, a lot of times they may be structured as an ETF where it really is just exposure to an exchange. And there's no real stock picking that even goes on, but a hedge fund is kind of like a private mutual fund.
Roland Wiederaenders (12:24.918)
And then finally, we're talking about investments in commercial real estate. And there's an analogy to that. You may be heard of a real estate investment trust, and that's a public equity of public investment that focuses on real estate in a very similar way to how we have clients that sell commercial real estate deals. just so can understand,
[Sarah] Roland, I think what you just said out is we've been talking about private securities and you just set out how those are equivalent to the publicly traded securities or what we consider public securities. So we can emphasize the distinction and then maybe you could exactly set out again, which ones compared to which ones. Yeah. Yeah.
[Roland] So this is important. Likening what we're describing to things that I think our audience
is already familiar with. Exactly. Yeah. So I think most of our audience has heard the term mutual fund before and probably ETF and what these are, they're funds. You invest in these funds and you buy a share of those funds. And what they do is they take your money and they turn around and invest in publicly traded stock. And so they create a basket of
shares of stock in that portfolio, and they can do it in a couple different ways. They can focus on maybe one specific segment of the market, shares that are traded on a specific exchange. Or like I was mentioning, we talked about before the ETF, it's an exchange traded fund where I'm really agnostic as to the individual stocks. And I just believe that the S &P 500 over the
history of its existence. When I was first starting out in this business, people would say, well, historically the stock market has returned 8 % return year over year. And now it's more like 7%. But you could invest in a maybe not broad, but yeah, a basket of securities, but it just completely replicates the S &P 500. So if you want to know how you do in your
Roland Wiederaenders (14:46.286)
your S &P 500 ETF, you can just watch the nightly news and they say, you know, the S &P 500 went up, you know, 30 points today and you can feel good about your ETF. Your ETF had identical performance because it mirrors completely the weight, you know, the composition and weighting of all the stocks that make up the S &P 500. And we can, you know, we could devote an entire episode to talk about the.
You know, [missed a chunk here]
[Sarah]So, I mean, those are all really good things, right? And that's why probably most investment advisors would consider that a cornerstone of a balance or a healthy portfolio. So to contrast that, once you have enough, I think, in your portfolio that you've got, it's time to start considering alternative assets. That's where...
the world of private securities, while it makes up a lesser percent of most people's investment portfolios, there's probably arguably a much larger diversity of different kinds of projects and things that people can invest in. And they're all captured under these three headings or five, technically, that Roland's just mentioned, which is, you know, real estate, private equity, hedge funds, and of course, infrastructure and natural resources. So I think this is a really exciting area for that reason, because you're dealing with a little bit more level of knowledge and sophistication when you need to be thinking a little more when you're ready to invest in those kinds of assets. And then there's a certain framework and details to understand, right? But you can always come back to this framework of what is private equity? it's related to, it's not dissimilar from just buying a stock directly that's publicly traded, right?
Roland Wiederaenders (17:05.698)
Like people get excited about owning Amazon or Apple or whatever. This is, you know, on a micro scale, what private equity is. So actually some private equity is extremely valuable, right? And there are huge private businesses in the world that people don't know too much about because the disclosure obligations are different. Not that they're not present, but they're not as strenuous maybe as a listed security. So,I find all of that really interesting. And also I think it's important that people start to understand these differences.
[Roland] I think people only have a loose understanding of what a security is, honestly. So let's talk about that some more. Yeah. What do you think most people, when I say I'm a securities lawyer, what do think they imagine?
[Sarah] I really think it could be potentially confusing. Like maybe insurance. Yeah.
[Roland] Yeah. Or maybe like they think I'm going to guard them against assassination or something like that.
[Sarah]Government benefits.
[Roland] Yeah. But a security, think once once you stop and think about it, most people, their their mind will go, well, that's like the stock market investing in a share of stock and a share of stock is an interest in a corporation.
Exactly. And almost all the public equities that you think about Exxon or Apple or Meta, X, Twitter, whatever, all these public companies, they're organized as corporations. And corporations, the securities that corporations sell are shares of stock. And so we actually don't work that much with corporations specifically.
There are other types of business entities as well. And our audience members probably have heard of things like limited liability companies and limited partnerships. And there you have to think, well, it's not really that different from a corporation. It's a separate business entity that you form by filing a document with the secretary of state. And then once you have approval, once your entity has been formed, then you can go out and sell securities.
Roland Wiederaenders (19:22.458)
We use LLCs almost exclusively. In an LLC, what you buy, you don't buy a share of stock, you buy a membership interest. And it's kind of similar to a limited partnership, which is another type of entity. And if you want to buy a security that's sold by a limited partnership, you're going to be buying, guess what, what it's called?
[Sarah] An interest. A limited partnership interest.
[Roland] So it's obvious and you have to kind of step back and think about it. But what's really important, I think we're attorneys, of course. And so we go to the law and there is a seminal United States Supreme Court case that I always like to talk about because it really highlights the importance of what a security is and why it's a thing.
[Sarah]Well, that's the Howey case, right?
[Roland] Exactly.
And, you know, we geek out on language. It's kind of our background. But I really I like this this definition, and I'm just going to read it. And they phrase it in a form of a question. They're thinking about an investment contract, which is a type of security. But the question that the court will ask is, was there an investment? So I would think like a transfer of money here, Sarah, I'm giving you money and you go off and take you know, do something with that. was there an investment in a common enterprise? Well, it's not only me giving you money, but there's 20 other people who are giving you money and you've got your partners. And we're all involved in this common enterprise, hoping that you're going to take the money that we invest and you're going to go off and make more money for everybody else. That common common enterprise.
And then with a reasonable expectation of profit. So we're not investing in a not for profit or a tax exempt entity, a charitable organization, we're trying to make money here. We're being clear about that upfront. And this is I think this last part is the most important thing. It's the profits are to be derived solely from the entrepreneurial or managerial efforts of others. So in my mind, when I describe security securities law to people, what is a security? I say there's a
Roland Wiederaenders (21:44.726)
differentiation between owner ownership and management or control. So I own the entity. You know, I'm one of the shareholders or one of the membership interest holders or one of the limited partnership holders. So I own the equity of the entity, but I don't control it. I wasn't out there trying to design the innovative, you know, electric motor design. I'm not out there picking.
you know, for the hedge fund, you know, to invest in this security or that security. I'm not picking out the color of paint for the commercial real estate development. I'm I'm relying on the efforts of others. And that's the way it should be, because I've always seen this as, know, I've always been really inspired working in this area, because I think this that if you have a good idea, it shouldn't fail for lack of funding, because there are a ton of people out there who have a lot of money but they don't have any ideas. And so what we do as attorneys is we marry those two people together. Yeah. And then the person takes the money and goes off and does something with it, makes a bunch of money for everybody, for themselves and their investors. And everybody goes away happy. And I really like that, that idea of democratization,
[Sarah] you know, we were talking about that yesterday, weren't you? That this, you know, and we'll we're talking some about what's captured in the U .S. regulations. We will set out a framework of what that really specifically is in due course. But for now, the overall beauty of this system that we have in our country is that there is this democratization of capital. And what Roland is talking about, what you're talking about is exactly what that is. This is how you do it. You enter into an investment contract with other people who are going to use their energy and creative ideas to make money for everybody. It's ultimately like capturing win -win in legal contract, in a legal context and a financial context. And that's how it happens. That's how it's happened since the beginning of the creation of these legal entities. know, it's not investing in someone else's enterprise is probably as old as the wheel.
[Roland] Well, for sure. This is one of the things that you bring to this, Sarah, is that you have
Roland Wiederaenders (24:05.388)
really in -depth knowledge of doing business and other cultures. And one of the things that we've talked about is we've gotten to be better friends is, you you just kind of describing to me how it's so difficult to do things in other countries that I just sort of take for granted here. Yeah.
[Sarah]And I mean, we'll get to talk about that over time because really the American promise or, you know, we have our government and our structure and America as a country itself was a first mover in terms of a modern democracy and a modern constitution. And there are a lot of problems also that come from that, but in the end, when it comes to the ability of individuals, regardless of background, to come forward and potentially have ideas that don't fail for a lack of funding, really this country is at the top in the leader in what that is. And incidentally, like our securities laws, which are the basis of modern security law worldwide. Now, maybe arguably other countries have better securities laws because they're younger laws. And that's a level of detail to get into another time. But the concept of all of this and the hard times that Americans in the past went through, you through making bad investments. I mean, that's essentially what happened in the 20s, right? And is the source of why we have all these laws and actually what they do is they really, in my view, really just support people from whether you're starting at a point where you have saved up $100,000 or where you're starting from a point where you have a million or where you're starting from a point where you have a hundred million, the same laws support you and your growth and your wealth growth journey. And that's a pretty incredible thing to have.
[Roland] Yeah. And it's it's, it's, it's actually fun now, representing people. And the thing that I just connect the most with is, is all of our clients, they're really trying to create value. And so that's really what I connect with is, is we're creating these value opportunities for investors and they are primarily for
Roland Wiederaenders (26:15.63)
wealthier investors. And we'll talk about this. Sarah already mentioned the idea of an accredited investor. It's somebody, an individual with at least a million dollars net worth or income of 200,000 by themselves or 300,000 together with their spouse. But one thing that I would note is that there really is a mega trend in the development of securities laws. And I think the way that the SEC thinks about this is I think that the SEC wants to enable more people to invest in private securities. so this trend is something that we're taking advantage of. Again, in 2013, it was 11 years ago, but in terms of the development of the securities laws, it's just almost like yesterday. And still it's being fleshed out how some of these changes you know, will have relevance, but that really is an idea is giving more people access to investments in private securities. And what that means is more people access to alternative assets. And that's why we've done this, Sarah, because we recognize.
[Sarah] Yeah, that's why we're really, think I was arguably were passionate about the fact that there's a lot of information that we want to consolidate for people here.
Whether it's technical legal, whether it's through experts who can talk very coherently about the specific areas of investment, because another beautiful thing about alternative assets is that you can really have mission-driven investment projects. And that matters to a lot of people. And whether you're starting small or starting big, some people really want to invest in projects that create value in society in a way that aligns with their values.
And that can all be done by individuals through alternative investments. It's not that you need to wait around for one of the big gigantic financial mutual fund parties like Fidelity or whatever to launch the fund in XYZ, whatever it is that you're interested in. this is, know, and all of this, I guess a key point, Roland, is that all of this is going on already. It's just maybe a lot of people don't realize unless you are deeply in the know.
Roland Wiederaenders (28:38.786)
And we want to make sure that as many people as possible are in the know about this area.
[Roland] That's a really good point, Sarah, because like we were talking before about where people get their ideas about what a security is and they think about the stock markets and they tune into the nightly news. And I don't really watch TV anymore, but the nightly news still is a thing. And I think that they do report stock market movements. And that's what people think about when they think about investing. And this is something that we really want to be able to do.
with this vehicle, this webcast that we're creating is tell people about opportunities to invest in private securities and alternative assets. And I'm really
[Sarah] And support our clients also, because just the way that people are, if you're blessed and you're looking for an investment, the person who has the project that needs funding is also looking for investors. And that's what Roland as an investment advisor can do is he can connect
you know, the party with the money to the party who needs the money. And also, you know, a key part of that is that it's all done in a way that's transparent, that all of the laws are complied with, which are fairly straightforward. And that, you know, you can't promise any outcome in any kind of investment, including when you invest in the stock market, right, the publicly traded stock market. But you can at least know that you've done your due diligence and we'll we'll get into some of that detail.
[Roland] In conclusion, what are some of the key takeaways from this episode?
[Sarah Well, I would say the first is that the alternative asset class is different from the public securities market. And it's important to understand that.
[Roland] If you're confused about what an alternative asset is, you probably know more than what you think. And all you need is just a framework to think about it. And so, as I mentioned before, I think, you know, we tried to give you a high level framework and please continue to tune in. We were going to have additional episodes in the future that talk more about topical things. And then also we're going to be introducing you to some of our clients. But what I would encourage you to do, like I said at the beginning, is go talk to your financial advisor, your financial planner, and tell them that you watch this.
Roland Wiederaenders (31:01.174)
webcast about alternative assets. And you want to learn more about how you can incorporate alternative assets into your investment portfolio. We've got a few episodes planned where we're going to be able to talk more about just the fundamentals of alternative assets and some more of these issues that are really important to provide, you know, our audience with some of this educational material so that they can talk to their financial planner in a more educated way.
[Sarah]Please subscribe, follow us, and stay tuned for future episodes. Thanks for watching and listening, everybody. Take aim with your alternative asset investing strategies. See you next week on Alt Investing Made Easy.