Financial Poise
A dewy apple, representing the fruits of your labor as tangible investments, not intangible assets

Alternative Assets and the “Average” Accredited Investor Installment #12: Tangible Investments

Purchasing More than 0’s and 1’s on a Computer Screen

Tangible assets are assets that usually have a physical form and have a commercial or transactional value. A tangible asset can be consumed in some manner.  For example, real estate is a tangible asset, it has a physical form and its value is easily determined based on “fair market value”. By contrast, stocks or bonds are considered intangible assets.

As noted in Installment 1, tangible assets include all sorts of things: antiques, apple orchards, art, banana farms, comic books, date farms, emus, gold, oil, natural gas, silver, stamps, wine, and at least a thousand other things.

But wait, you don’t have to be an accredited investor to buy any of these things. In fact, if you love comic books, want a collection of fine wines or really love apples and want to own an apple orchard, you could buy those today  So why are we mentioning them in an article intended for accredited investors?

This installment deals with tangible investments, not direct investments into tangible assets. While you do not need to be an accredited investor to invest directly in “tangible”  assets (go ahead and buy that orchard), you do need to be an accredited investor to invest in a private equity fund or hedge fund that invests in “hard” alternative assets. And, for all the reasons discussed in Installment 3, you will undoubtedly become aware of opportunities to invest in such funds.

Direct v. Indirect Investments in Tangible Assets

Before we proceed, we want to make sure you and we are on the same page, in terms of terminology. Direct investment into tangible assets has more to do with your interests (or childhood passions) than your investment portfolio. For example, if you want to start collecting baseball cards or if you want to buy a farm, you don’t need to be an accredited investor. You can scour the internet or auctions to find a Mickey Mantle rookie card. Similarly, you can start a hobby farm with enough land and a passion for farming  Anyone can buy any tangible asset.

If you want to diversify your investment portfolio to include exposure to one of these tangible assets without the bother of actually buying them, this is an indirect tangible investment., You can find an investment fund whose investment mandate is to buy such assets. To do this, that is to be a passive investor in a tangible asset, you do need to be an accredited investor.

What about Intangible Assets?

The investment community uses the terms “tangible assets” or “hard assets” to distinguish this type of alternative asset from the ownership of a share, membership interest, certificate, or other evidence of the ownership of equity and debt securities.  But are there assets which do not have a physical form that can be considered tangible assets? What about, for example, intellectual property?

You can, if you want, buy a trademark, copyright, patent, or some other item of intellectual property on your own.  So, if you buy IP, are you buying a tangible asset? No, in the more general sense of the word, you are not. But for our purposes, we would call this a tangible asset, to distinguish it from an investment you could make in a fund that, in turn, invests in IP.

This is not unique to IP. We could substitute the term “accounts receivable,” “defaulted promissory notes” or any number of others for the word IP in the preceding paragraph, and our point would be the same.

Why Tangible Investments?

In a word, diversification: the price of various tangible assets simply is not correlated to the broader financial markets and, indeed, in some cases there is a negative correlation. In other words, the price of fine wine is not necessarily going to go down because the stock market goes down. Moreover, some tangible assets are more likely to go up when the stock market goes down. The price of gold, for example, traditionally acts in this way.

Which Tangible Investments?

We do not recommend specific investments in this series. Nor do we recommend specific types of alternative assets. That said, we will make this suggestion about tangible investments: if you want to collect stamps or comic books because you love to look at them, go ahead. However, if your main goal is investment-related, we suggest that your first foray into tangible alternative assets be focused on farmland, timberland, and other natural resources.

Why? Our thinking on this is very simplistic: you can eat the things grown on farms and you can burn wood.

[Editor’s Note: You may be interested in these related webinars: Alternative Assets Part 1: Investing in Venture Capital, Private Equity, and Hedge Funds, and Buying and Selling IP.

Read More

This is one in a series of articles dedicated to the 95% of people in the U.S. who have never invested in a startup, a venture capital fund, a private equity fund, or a hedge fund even though they are permitted to do so and even though doing so may make sense to achieve property diversification. While we encourage you to read this series in order, you certainly don’t need to. Each installment is designed so it can be read as a stand-alone article. Here they are in case you want to skip around:

Who are ‘We’?

Alternative Investment Guide

You will notice that throughout this series, I use the term “we.” This is done to acknowledge the great editorial assistance of the Financial Poise Editorial Team. This series is based on my book The Investor’s Guide to Alternative Assets: The JOBS Act, “Accredited” Investing, and You.

 

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About Jonathan Friedland

Jonathan Friedland is a senior partner in Sugar Felsenthal Grais & Helsinger LLP’s Chicago office. He is ranked AV® Preeminent™ by Martindale.com, has been repeatedly recognized as a “SuperLawyer”, by Leading Lawyers Magazine, is rated 10/10 by AVVO, and has received numerous other accolades. He has been profiled, interviewed, and/or quoted in publications such as Buyouts…

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