Alternative assets: growing retirement balances in a low-interest-rate environment.

• Author: Wells, Doug
• Position: Money Talk

My bank statement arrived a few days ago, and I was frustrated to see my interest rate was just 0.01 percent. To put that in perspective, a $1,000 account earns just 10 cents of interest annually.

For people in retirement, today's low interest rates present an enormous challenge. Long gone are the days when a retiree could simply put their money in the bank and live off the 5 percent interest that would give them $50,000 a year on a $1 million balance. Today, that same $1 million yields just $100 a year at my bank or $20,000 a year in relatively secure corporate bonds.

So what is an investor to do? First, don't panic. A 5-percent total return is within the range of reason for a balanced account of stocks and bonds.

Some investors, however, want to know what alternatives they have outside of traditional stocks and bonds. These "alternative investments" include choices such as private equity, venture capital, oil and gas partnerships, mezzanine financing, private debt and others. More broadly defined, alternative assets are simply investments that do not trade on a public exchange like the NYSE.

Income Investments

Historically, many alternative assets have beaten the performance of the broader stock market for two primary reasons. First, private markets tend to be less efficient than public markets. Think of this concept as "buying wholesale and selling retail." For example, private equity managers often purchase companies for four to eight times the company's annual earnings (wholesale). If the manager can acquire 12-20 companies in the same industry, she can likely take it public for 10-20 times earnings (retail).

Second, these managers tend to be active in their investments. They have control levers to improve the company's results such as expanding into new markets, broadening the product line, reducing costs or better aligning the incentives of the senior executives.

As difficult as it is to find quality income investments in the public market, the exact opposite is true on the nonpublic, "alternative" side--conditions have seldom been more attractive. Two examples include:

Cash flow-oriented private equity funds: These funds tend to yield 8-12 percent per year. They invest in old, boring recurring revenue industries such as landfills, frozen food storage and land leases under cell phone towers or billboards. Compared to the risks of high-yield bonds delivering similar yields, "old and boring" sounds delightful to most investors.

Private...