We sat down with Hannah Kaplan, Director of Organizational Development, to discuss her current role at Altera, why she believes Altera’s diverse and collaborative team is the differentiator among other firms in the industry, and what she feels is her most notable achievement so far at Altera.
The lower middle market in the United States has long been a fertile hunting ground for private equity investing. AlphaWeek’s Greg Winterton spoke to David Fershteyn, CEO at Atlanta, GA-based Altera Private, to learn more about his firm and its activities in the space.
GW: David, tell us what it is about the lower middle market that Altera finds particularly appealing.
DF: Like most professional investors, we are hyper focused on generating attractive risk-adjusted returns for our limited partners – the question is how do we achieve this? Our journey to focusing solely on the lower middle market started with us deciding what “game” we wanted to play, and then making sure our game had an increased probability of investment success. The most important factor for us in this decision was trying to identify where there is market inefficiency and why. The number of publicly traded companies has declined to ~4,0001, while assets held by public equity funds have steadily increased. Billions of dollars chasing a shrinking, limited universe of opportunities (where there is much more transparency and analyst coverage) didn’t seem like the best chance of generating alpha for our investors…
1McKinsey & Company, Reports of Corporates’ Demise Have Been Greatly Exaggerated, October 2021.
Disclosure: This information does not constitute investment advice or suggest an offer to sell, or the solicitation of an offer to buy, any securities or other financial products. All information is provided as of the date referenced and has not been updated since that date for any information contained in it that may have changed, including any beliefs and/or opinions.
“You and your stakeholders need to have incredibly clear alignment and incentives. Everyone operates based off of the incentives they have, and for an organization to flourish, key parties must be aligned…”
CEO David Fershteyn provides his insights in Medium Authority Magazine’s “5 Things I Wish Someone Told Me Before I Became a Founder” series.
We sat down with Tim Godin, Senior Associate, to discuss his current role at Altera, why he believes Altera’s investment offering differentiates the firm from others in the industry, and what he feels is his most notable achievement so far at Altera.
Is it possible to get a mid-to high-single digit annual yield in publicly traded fixed income or real estate investments? Yes. Further, are public options less risky compared to private fixed income or real estate? The answer to that second question, at least at a high level, generally appears to be no.
Whether referred to as income or yield, the notion of relying on a portion of a portfolio to generate recurring cash flow has become increasingly unreliable. At its core, yield is a product of an asset’s operating income (e.g., a portfolio of rental properties or the coupon payments on loans), which can be modeled with a fair degree of confidence. What is harder to account for, is the ongoing impact of changes in interest rates, the creditworthiness of borrowers, and the relationship an investment has with other assets, particularly if those assets are traded in the public markets. Each of these traits affects the level of investment risk and begs the question of whether seeking yield at the expense of adding what may be disproportionate risk is worth it or necessary.
What distinguishes yield-seeking investments in public markets versus those in private markets?
There are plenty of public debt instruments and real estate investment trusts (REITs) that advertise high yields (in some cases high single- to low-double digit annual yields). However, those yields are often tied to undesirable characteristics such as higher leverage multiples, lower quality borrowers, less secure or unsecured loans, and fixed interest rates at prevailing market rates.
Public yield seeking investments introduce varying levels of exposure to these characteristics while also presenting investors with a related dilemma. As most of these investments are tradeable on the public markets, the impact of changes to interest rates or credit downgrades may make investors uncomfortable and susceptible to abandoning a position. This behavior is all too common in public markets, creating a decision point of whether there is more value in exiting a position to preserve capital, or in being patient so as to realize the potential associated yield over the long term.
By contrast, private market investments seeking yield are not often subject to the same behavioral risks, in large part due to illiquidity. In isolation, illiquidity is a polarizing concept, where some investors view it as a risk and others as a benefit, but it does remove the ability for investors to abandon a position and allows sponsors to build a high yielding portfolio over a long term, which is typically a net benefit to all parties involved. Further, private market debt instruments and real estate typically include investor protections that public markets typically do not, such as conservative leverage multiples, capital stack seniority, collateral, and robust covenant packages. These protections further enhance investment in assets with durable operating cash flows. Collectively, these allow private credit and real estate sponsors to generate attractive yields on an absolute basis (high single- to low-double digit annual yields), as well as on a risk-adjusted basis.
As an investment firm focused on identifying private market investments offering differentiated sources of return in the lower- and lower-middle market, Altera views private yield-producing assets as highly desirable with a risk/return profile that perhaps may be more easily understood.
Altera is proud to announce the completion of a strategic capital round. Co-founder and CEO, David Fershteyn states “We are pleased to close this strategic growth round and look forward to continuing to provide high net worth investors differentiated sources of return through our private market investment strategies.”
The Wall Street Journal recently reported that an increasing number of accredited investors are seeking to invest in private markets. Historically, these investors have only allocated approximately 2% of their investible assets to private markets, which is considerably lower than the programmatic, double-digit allocations across institutions like pensions and endowments.1 This spread in allocations to private markets stems from differences in these investors’ structure and time horizon, as well as their respective approaches to decision making and evaluating risk.
Pension plans and endowments are generally considered perpetual vehicles, maintaining their investment programs to meet a prospective book of liabilities (either short or long term) or provide capital for strategic programs several years in the future. They can afford to take an extremely long-term perspective on markets and individual assets and view the illiquidity in private market investments as an acceptable risk and return proposition. Over the last decade, this approach to aligning views and capital goals has been adopted by a wider cohort of investors, including high-net-worth individuals. People, of course, are not perpetual entities, and invest in accordance with certain goals they have in their lives.
Across high-net-worth individuals, differences in investment goals should warrant differences in approach and risk and return expectations. Illiquidity can be considered as one factor in an investor’s approach, typically as a premium (i.e., greater expected returns than liquid assets) or an opportunity cost (i.e., committing capital for several years precludes investors from deploying that capital elsewhere in the interim). Another common factor to consider is an investment’s size, which we can assess through several lenses (e.g., size of the market, size of the underlying asset, size of the transaction, etc.). All these definitions would allow investors to draw distinctions between larger and smaller deals, which each have their nuances, but the size of the underlying asset is the most common.
Investment size is a large driver behind differences in portfolio composition across institutions and individual investors. Larger institutional investors are generally incapable of considering lower- and lower-middle market opportunities as most have concentration limitations embedded in their investment policy agreements. For example, a smaller fund targeting $400 million and investing in companies with less than $25 million in EBITDA would be inaccessible to an institution seeking to invest $100 million, if they have a concentration limit set to 20% of commitments. It would make much more sense for this institution to target investments in larger funds (>$1 billion). Further, this limitation is why many institutions have extremely large, diverse portfolios, invested across several funds, or establish pooled “emerging manager programs” to invest in smaller opportunities.
Conversely, it’s more challenging for high-net-worth individuals to invest in larger funds, since capacity is largely consumed by institutions, and investment minimums are significantly more than most individuals can afford on their own. However, strides have been made recently to provide access to large funds through technology-based allocation platforms, such as iCapital or CAIS. These services allow large funds to target wealthy individuals and registered investment advisors (RIA), two cohorts of investors that they wouldn’t traditionally approach. The benefit for large funds is that they’re able to diversify their LP base away from institutional capital, in which allocations are defined by investor policy agreements and have little flexibility. The benefit for investors is that large funds are typically managed by reputable and successful firms (e.g., Blackstone, Carlyle, KKR, etc.), and many perceive that these funds are less risky than smaller funds. However, individual investors have greater flexibility and evolving priorities, and their decision to allocate to private markets could be meaningful. In such cases, smaller, differentiated investment options could have a material impact on an individual’s livelihood, either positively or negatively. While lower- and lower-middle market opportunities should outperform their larger peers2, there are thousands of investments to choose from, which can be daunting for many investors. This is where an investment platform like Altera may add value to qualified investors and RIAs seeking investments in private markets.
Altera is a private markets investment firm and institutional due diligence platform focused exclusively on the lower- and lower-middle market. We believe that qualified investors should have access to best-in-class investment opportunities in private markets, and by providing clients with a frictionless investor experience, lower investment minimums, proprietary market research, underwriting guidance, and access to differentiated solutions across private equity, private credit, and real assets, Altera helps to bridge the gap between high-net-worth individuals and institutions.
1 “Wealthy Investors Pile Into Private Equity to Escape Stock Volatility” https://www.wsj.com/articles/wealthy-investors-pile-into-private-equity-to-escape-stock-volatility-11653561000.
2According to the NAICS Association, there are over 200,000 companies in the United States with revenues >$5M, which presents a broad universe of potential investment opportunities for lower- and lower-middle market sponsors. Generally, if there is less competition for a deal, a sponsor can acquire an asset for less, which provides a downside margin of safety and potential multiple expansion if sold at a comparable price to larger assets. It’s important to note however, that this is a guideline for expectations – every transaction is different, and sponsors can deploy many different investment strategies, some of which may not align with this framework.
We sat down with Tim Partridge, Managing Director, to discuss his current role at Altera, when his passion for private markets started, and why he feels the way Altera works with its clients sets the firm apart from others in the industry.
Altera has reached an important milestone as a firm, crossing $250M in committed capital. In 2022, Altera is on track to make $150M in new LP commitments to lower middle market private funds and direct deals.
Altera is well-positioned for future growth as more RIAs and high-net-worth individuals continue to leverage its alternative investment platform.
Altera provides hundreds of investors access to institutional-quality private deals that historically have been difficult to identify and access.