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Navigating Alternative Investments: Why a Solid Exit Strategy is Your Key to Success

Aug 29, 2024

Article

Reading Time: 5 minutes
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Well-planned and executed exit strategies are important for any investment, but when entering a less liquid market such as alternative investments, your exit strategy is crucial. Alternative investments have been seeing a monumental boom, both in value and popularity, lately as traditional investors seek to hedge against the volatility of the stock market and aspire to more dynamic returns than Bonds; for comparison, the current UK 10-year Bond yield is 47.46% at the time of writing and the Knight Frank Luxury Investment Index which is the average of the 10 most prevalent luxury investments is reporting 10-year returns of 100%. This surge in popularity can also be attributed to increased accessibility; investors can not only access these products more readily and at lower entry points than before, but information about the products is much more prevalent. 

 

One of the most important things for investors to consider is liquidity and the availability of a reliable exit route. While stocks are entirely liquid and bonds have a set maturity date, many alternative investments, such as Art or Fine Wine, are less liquid, which can be a concern to many investors. One should always research the exit process when entering any alternative investment market. 

 

Recently, the liquidity or lack thereof of the Fine Wine market has been trending as celebrity chef Eddie Gallagher shared his story of investing with Wine Investment Firm, Oeno. Gallagher purchased $10,000 worth of Fine Wine through Oeno when visiting London, unfortunately upon checking his portfolio 2 years later he discovered that his investment had accrued just 0.3% which prompted him to sell off his wine but to date, has only been able to liquidate 25% of his portfolio.

 

This has become a common trend amongst wine investors. The wine market saw a phenomenal boom between 2016 and 2023, a result of foreign investors taking advantage of the post-Brexit crash of the Pound while the market benefited from the increased at-home drinking trend that emerged during COVID-19. Unfortunately, what goes up must come down; as Lockdowns were lifted, the Pound stabilised, and a supply glut flooded the wine market, the wine boom burst with LIVEX Fine Wine 100 reporting that the top 100 investable wines are down 15% since their 2022 peak. Nick Martin of Wine Owners posits that the wine market is undergoing a much overdue correction.

Average Time To Sell (Days)
This situation highlights how essential it is for investors to thoroughly research and plan exit strategies for their investments, as returns are only worthwhile once they have been realised. An exit strategy should focus on timeframe, goals and exit options with the aim being to achieve:

  • Risk mitigation and capital protection
  • Returns optimisation
  • Liquidity enhancement

 

Many account managers for reputable investment companies will run through the exit strategy with their clients as they will likely be more aware of the market and in possession of a better understanding of which goals are realistic and best exit options.

 

When considering the exit strategy for your portfolio, there are a series of factors that must be considered:

  • Market Conditions – As with any investment strategy, a host of macroeconomic situations must be considered when building an exit strategy – historic market, market cycles and economic forecasts can all impact the liquidity of your investments.
  • Timing – Timing is everything with investments; the importance of timing an exit strategy is ensuring that you achieve the returns that match your goals while the market is liquid enough to actually cash in and realise your returns.
  • Regulatory Considerations – It is important to incorporate tax implications or compliance requirements in your exit strategy; this will allow for any hidden surprises upon liquidating your investment portfolio.
  • Your Own Goals – Ultimately, it is essential for investors to ensure that their exit strategies are symbiotically aligned with their long-term investment goals. 

 

There are a myriad of challenges and pitfalls that investors must overcome and avoid in order to formulate an effective exit strategy. One of the biggest pitfalls that investors make is underestimating the tax burden that they are likely to encounter upon exit from a market; Forbes recommends that investors must be “acutely aware of the tax consequences of their exit strategies” and warns that this is an area that is, “often complex and ever-changing.” Many investors often fall foul of not diversifying their exit strategies; things rarely go to plan in life, so having a contingency plan in place for your exit is always going to help to ensure a smooth exit.

 

Overall, there are a great deal of factors to be considered when creating an exit strategy, from the exit options to the timeframe, all of which are equally crucial in ensuring a seamless and fruitful exit. When entering the alternative investment market, it is especially important to have an effective exit strategy prepared, as a good exit strategy can make even the most illiquid markets easier to exit. Part of our research on companies offering alternative investments focuses on the efficacy and success of the exit strategies they tailor for their clients. If you can benefit from investing with a business that prioritises successful exit strategies for its clients, please enquire below.

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