Alternative Investment Types Presented at Blue Vault Bowman Alts Week
February 24, 2022 | James Sprow | Blue Vault
A wide variety of alternative investment programs are sponsored and managed by the investment firms that will be presenting at the Blue Vault Bowman Alts Week 2022 that begins March 7 and runs through March 11. Financial advisors will hear from investment program sponsors, asset managers, and fintech firms whose products make alternative investment transactions more efficient.
Nontraded REITs
Nontraded REITs are registered with the SEC, file regular reports with the SEC, but are not listed on an exchange and are not publicly traded. Continuously offered nontraded REIT programs, as opposed to traditional life-cycle REITs, are now raising almost all capital in the space, with huge asset managers like Blackstone and Starwood dominating fundraising. Twelve continuously offered nontraded REITs are currently in the market and managing portfolios of commercial real estate that include multifamily, industrial, office, healthcare, self storage, student housing, retail, and other property types. Total assets in the nontraded REIT industry currently exceed $170 billion.
DSTs
A Delaware Statutory Trust (DST) is a legally recognized trust that is set up for the purpose of business. DST’s have become popular as 1031 Tax Deferred Exchange properties. For real estate investment owners considering selling their appreciated property, it may be beneficial to consider a DST as replacement property when utilizing a tax-deferred 1031 Exchange. DSTs may provide a unique and flexible solution to investment real estate owners looking to defer tax and continue to own investment real estate, yet seek to eliminate the active management of directly owned property. Delaware Statutory Trusts allow real estate investors to defer paying taxes on the sale of an investment property, which can be very expensive. In some states, the total amount of tax can be as high as 37%. In 2021, ExchangeRIght Real Estate raised $660 million for their necessity retail and healthcare investments in DST vehicles.
Interval Funds
Interval funds essentially combine some characteristics of both open- and closed-end mutual funds. Although legally structured as closed-end funds, interval funds differ from their traditional counterparts in two notable ways: they typically don’t undergo an initial public offering (where a set number of shares are issued), nor do they trade on an exchange. Instead, interval funds are continuously offered, and shares are issued on an ongoing basis, much like open-end mutual funds. Liquidity for traditional closed-end funds comes through daily exchange trading, whereas interval funds provide periodic repurchase offers at each scheduled interval. This limited fund level liquidity allows the manager flexibility to invest in less liquid securities of public, and potentially private, markets — investments that might otherwise only be available through private funds that come with higher fees and more complicated tax structures. CION Ares Diversified Credit Fund raised over $1 billion for the interval fund in 2021.
Private Equity
Private equity refers to funds that are invested directly into companies, rather than publicly traded stocks. Businesses can use this money for expansion, marketing, and acquisitions. Many private equity firms will require long holding periods, and share prices are typically determined through negotiations. Many investors choose to work with private equity firms instead of making direct investments themselves to avoid dealing with the lengthy negotiation process. Private equity firms work by raising money from investors and investing the funds in different businesses.
Private Debt
Private debt refers to investments that are not financed by banks (i.e., a bank loan) or traded on an open market. The “private” part of the term is important—it refers to the investment instrument itself, rather than the borrower of the debt, as both public and private companies can borrow via private debt. Private debt is leveraged when companies need additional capital to grow their businesses. The companies that issue the capital are called private debt funds, and they typically make money in two ways: through interest payments and the repayment of the initial loan.
Qualified Opportunity Funds
A Qualified Opportunity Fund is any investment vehicle that is organized as a corporation or a partnership for the purpose of investing in Qualified Opportunity Zones that holds at least 90% of its assets in Qualified Opportunity Zone (QOZ) property.
Qualified Opportunity Zone property refers to property that is a QOZ stock, a QOZ partnership interest, or a QOZ business property acquired after December 31, 2017, used in a trade or business conducted in a QOZ or ownership interest in an entity (stock and partnership interests) operating with such tangible
Tax deferral through 2026 – A taxpayer may elect to defer the tax on some or all of a capital gain if, during the 180-day period beginning at the date of sale/exchange, they invest in a Qualified Opportunity Fund. Any taxable gain invested in a Qualified Opportunity Fund is not recognized until December 31, 2026, or until the interest in the fund is sold or exchanged, whichever occurs first.
A taxpayer who defers gains through a Qualified Opportunity Fund investment receives a 10% step-up in tax basis after five years and an additional 5% step-up after seven years. Note that to take full advantage of the 15% step-up in tax basis, the taxpayer must have invested by December 31, 2019. When the tax is triggered at the end of 2026, the taxpayer will have held the investment in the fund for seven years, thereby qualifying for the 15% increase in tax basis.
No tax on appreciation – Remaining in the Qualified Opportunity Fund for at least 10 years results in the cost basis of the property being equal to the fair market value on the date of sale/exchange.
Nontraded BDCs
A business development company (BDC) is a closed-end investment company that invests in small- and medium-sized businesses, including new and distressed companies. As such, BDCs are required to register under the Investment Company Act of 1940.
BDCs can be both public and private. Both types of BDCs invest a minimum of 70% of their assets in private companies in the U.S. Private BDCs are called non-traded business development companies and aren’t subject to the risk of share price volatility the way their traded counterparts are on the public market.
Nontraded Preferred Stock Offerings
Several listed REITs are currently raising funds by issuing nontraded preferred stock. In January 2022 alone, seven listed REITs that reported their sales of nonlisted preferred stock issued $65 million in such shares. Bluerock Residential Growth REIT issued over $500 million in nontraded preferred stock in 2021.
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