SEEKING RETURNS IN UNCERTAIN TIMES

ALTERNATIVE
ASSETS

CONFIDENTIAL AND PROPRIETARY.

1
FOR PROFESSIONAL CLIENTS AND PARTNERS ONLY. CONFIDENTIAL AND PROPRIETARY
 2022 - 2023
INVESTMENT
OUTLOOK
T
he only certainty in today's global environment is that uncertainty reigns.
Geopolitical turmoil, ongoing in lation, energy crises, and leading indicators of a
budding recession create a storm of investment insecurity. Central banks in the US
and globally are struggling to stabilize in lation. Equity markets remain turbulent against a
backdrop of the US Federal Reserve’s iterative 75 BPS monthly interest rate increases.
Currencies in Europe, the UK, and other countries continue to lose value against the US
dollar with little relief. Experts expect continued market volatility to be the theme of the
remainder of 2022, with an increasingly sluggish economy reinforcing the malaise. Even
typically positive harbingers like a robust real estate market and strong labor pool aren’t
the bene icial economic variables they appear to be. Both mask undergirding economic
turbulence as the former prices middle-class Americans out of home ownership, and the
latter directly contributes to rising in lation by increasing demand against struggling
supplies.

Against this landscape, investors struggle to ind safe havens for their capital and
continually seek alpha to defeat in lation. The bull market of the past decade ampli ies
the complexity of today's bear market by serving as a stark contrast. Many independent
investors are adrift with plunging net worth as stocks luctuate and the rising interest
rates drive real estate values down. Financial advisors are hard-pressed to deliver
superior returns to their clients while reassuring those who've never experienced volatility
as we see today.

Because of this volatility and doubt, alternative assets are becoming increasingly
attractive to investors seeking non-correlated returns or portfolio diversi ication.
Institutional investors, high net worth individuals, and family o ices have been allocating

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to the alternative asset classes for decades already. In this white paper, we’d like to
provide a brief discussion on how alternative assets can help combat in lation and
turbulence and generate alpha.

The starkest di erence in today’s approach is movement

into alternative asset classes in a bid to generate alpha,
reduce the impact of in lation on cash reserves and
decouple from short term market risk and volatility.

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 MACROECONOMIC OUTLOOK
Since 2008's Great Recession, rock-bottom federal funds rates have fueled rapid growth,
expansion, and equity returns. These returns compounded in the wake of the 2020
COVID-19 pandemic as the Federal Reserve slashed rates to zero, expanded its balance
sheet and printed over $10T to prop up the economy.

Even the relatively few scares since 2008 proved minor speed bumps: December 2018's
US stock market lash crash quickly rebounded as monetary tightening fears proved
immaterial. Abroad, 2011's European debt crisis, spurred by sovereign bank collapses,
abated after austerity measures and policy reform. No matter the circumstance or event,
economic tailwinds held irm, propelling the global economy on an unstoppable growth
trajectory.

Today, those winds seem to have shifted as we face a hawkish Fed, increasingly tight
iscal policy, slowing economic growth, and in lation expanding. These factors, amongst
other concerns, create a collective pessimistic outlook re lected in the broad equities
market.

INFLATION AND MONETARY POLICY

In lation is rising. Although the blame vacillates between excessive quantitative easing
and post-COVID supply/demand mismatch coupled with globally disrupted logistical
lines, all sources point to national in lation hovering above 8% without a clear exit path in
sight.

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To combat this, the Federal Reserve is letting assets fall o its balance sheet and, more
jolting to the economy, continuing with a monthly 75 BPS rate raise. And, as the Fed
targets an end-of-year rate of around 4.5%, companies are forced to contend with more
expensive operational debt, and the workforce will likely contract. Both the increased risk
of recession seems to mean an end to the "anything goes" investment strategy of the
past, where company fundamentals didn't matter, and no stock could lose an investor
money. While many enjoyed this bull run of the 2010s, the landscape seems to have
shifted su iciently that these former strategic anchors are not necessarily the reliable
bellwether they once were.

GLOBALIZATION AND GEOPOLITICAL TURMOIL

2021 and 2022 exposed the danger of national reliance on foreign manufacturing as
microchips, building materials, and many consumer essentials became scarce because
pent-up demand overwhelmed and slowed shipping. While the US may work towards
reducing that dependency, the short-term e ects continue to contribute to in lation and
hamper company operations, reducing pro itability and increasing default risk for low-
margin industries.

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 Globalization also means that activities across the world have impacts at home. As
con licts arise and continue worldwide, energy and other markets are thrown into turmoil
and have material and economic implications at home. War, currency luctuations, and
international realignment impact our bottom line in a way that investors have little
in luence over.

RECESSION WORRIES
This perfect storm of economic factors leaves many average Americans and investors
fearful of an imminent recession. Although di erent schools of thought quibble over
whether we are currently in a recession, the country is undoubtedly struggling.
Semantics aside, the question remains: will we fall into an undeniable slowdown, and how
long will it last?

Already some sectors are falling into what some deem a "rolling recession," wherein
industries contributing to GDP ebb and low rather than crash concurrently, leading to
slow or stagnant net GDP growth. Many Americans already feel the impacts of a national
recession, and the discomfort increases based on how close to the a ected industries
they work.

The fear of "pain to households and businesses," as FED Chairman Powell cryptically
referred to a potential recession, is leading to families preemptively cutting costs and
attempting to plan for an uncertain future – complicated, in no small part, by in lation
eating away at emergency funds and dreams of a smooth transition into retirement falling
as quickly as IRAs and 401(k)s. Currently, equities have sold o more than 20% YTD and,
despite trading at a relative discount, don't seem to have bottomed out as each new
market low falls further with limited respite.

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 THE STATE OF INVESTING
While there isn't a playbook for today's unique situation, many institutional investors and
family o ices use history as a reference point to guide and manage client portfolios in
reaction to the troubled economy. The current backdrop also serves to shake out and
separate the best of those irms from the cha . Any irm could make clients untold sums
of money over the past decade (while reaping healthy fees) simply by throwing money at
up-and-coming IPOs, SPACs, or high-growth/low-margin tech stocks. Now that the
playing ield is leveling out, many irms are rapidly falling out of favor because the "set
it and forget it" traditional trifecta isn't delivering today:

• Cash. As Ray Dalio emphasized for years, cash is trash – but for di erent reasons
today than when he coined the mantra. Against an 8% in lation rate, cash loses its
buying power daily. By lagging nominal growth in every regard, holding cash today
means less of it tomorrow. Even cash alternatives like short-term treasuries have an
e ective zero real return.

• Bonds. Individually selected bonds held to maturity can provide in lation-matching

cash low opportunities for wealthier investors able to build a bond ladder. Still, the
ixed income funds available to most are taking a beating. Rate-sensitive long-term
bonds that comprise most bond fund portfolios are getting crushed with each
successive rate raise. While bonds still provide risk adjustment for a comprehensive
portfolio, investors seeking excess return must look elsewhere, as even the largest
bond fund with $100B AUM lost nearly 15% YTD.

• Stocks. Stocks are struggling—tech and growth-focused stocks were the mega
winners over the past few years. Previously fueled by cheap debt that’s no longer
easily accessible, investors now demand higher returns commensurate with the
new level of risk. Many companies struggle to rise to the challenge, and their stock
price re lects this. Although the shifting paradigm does mean a return to focus on
fundamentals, and thus long-term sustainability and value, companies unable to
quickly pivot risk insolvency and the highest-earning stocks of the past few years
face the most risk. The core holdings making up more than 20% of the S&P 500 are
down a collective 30% YTD as of the writing of this white paper in October 2022.

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 THE QUEST FOR RESILIENT PORTFOLIOS
With these factors in mind, the 60/40 portfolio isn't returning what it once did for most
investors. Proactive investors are taking adaptive and innovative approaches to capital
management. One approach to rebalancing portfolios is to reduce exposure to low-
yielding ixed-income assets and paring back risky equities in favor of defensive
investments. However, this reactive approach only bu ers a portfolio against economic
downturns, and the most e ective investors ind a way to generate uncorrelated returns
despite the rest of the market activity.

First, let’s take a look at the global market portfolio of $179 Trillion of asset classes outside
cash:

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From here, let’s review the risk contribution of each asset class:

We notice that while global equities make up 43% of the global market portfolio, their
contribution to risk is at its highest at 75%. Government bonds make up 24% of the GMP
and carry a 3% risk contribution. Alternatives, while only at 4% of the GMP carry a 4% risk
contribution - almost the same as government bonds.

One report of family o ices shows exactly how sophisticated high-net-worth individuals
(HNWIs) and proactive funds are approaching the problem and further enhancing their
portfolios vs. the global market portfolio. Many institutional investors such as college
endowments notice this asymmetry between allocation and market risk and thus increase
their allocations to PE/VC alts.

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Current global polling indicates that alternative assets are approaching 50% allocation in
managed portfolios, with 19% of respondents also suggesting that they will continue to
reduce cash and ixed income allocations over the coming years.

Of the polled family o ices:

• 42% are increasing direct private equity holdings.

• 38% are increasing exposure to private equity indirectly through funds.
• 37% are increasing exposure to the real estate market.
• 27% are looking to private debt to generate returns.
• Although lower on the allocation ladder, commodity allocations will increase
by 10% in managed portfolios as a hedge against in ation.

Here, the family o ices are very accepting of the fact that alternative assets have low
liquidity, but because the traditional assets are impacted by turbulent macroeconomic
conditions, venture alts emerge as the most viable option as families work to rebalance
their portfolios.

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In addition, family o ices surveyed increased their allocation to VC “directs” year over
year, from a 9% level in 2019 to 13% in 2021. Investments in funds or fund of funds stayed
level at 8% signaling an increased appetite for direct and co-investment opportunities.

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 WHAT ARE ALTERNATIVE INVESTMENTS?
At its core, alternative investments describe investments outside the traditional stock,
bond, and cash allocation. Because of globalization, digitization, and increasingly
pervasive ETFs, alternative asset markets are arising to capitalize on any money-making
venture. Generally speaking, most of the most lucrative alternative assets are only
available to HWNIs as accredited investors or quali ied purchasers, but a small number of
boutique investment irms help bridge that gap for the average investor.

By maintaining exclusivity and developing strategies that take advantage of both

inaccessible markets and market ine iciencies, alternative investments can be a way to
o set traditional portfolio losses today and generate alpha in better economic conditions.
Often limited to quali ied or accredited investors with minimum investment or net worth
quali ications, the restricted access attracts the "best in the business" to manage these
alternative investments and funds. These high-performing managers aim to create
outsized returns for investors, limiting access and attracting more investors and
subsequent high-performing managers – creating a cyclical, self-reinforcing pattern of
economic success.

Preqin, a London investment analytics rm, predicts

that the alternative investment industry will hit more
than $23T trillion in 2026, compared to 2021's $13.3T.
And with a wide range of alternative investments to
choose from, investors can easily nd an asset class
that ts their investment philosophy, strategy, and risk
tolerance.

The core grouping of alternative assets is a tried-and-true set of dynamic, diverse options
for discerning investors who wish to avoid correlated market risk and are willing to
accept long-term investment horizons and low liquidity nature of the asset class.

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 CHARACTERISTICS OF ALTERNATIVE INVESTING
STRATEGIES
Aside from the potential to yield superior returns, alternative assets o er the following
bene its to investment portfolios:

• Diversi ication. A key bene it to alternative investments is portfolio diversi ication.

Many alternative investments are non-correlated to the market, which means
untethered asset returns compared to stock and bond performance. The asset's
merits are the guarantors of returns, so due diligence into the features, bene its,
and outlook of a particular investment could mean divorcing a portion of your
portfolio from the whims of the market.

• Risk-Adjusted Returns. In addition to total return, alternative investing provides an

outsized risk-to-reward ratio. Particularly in private equity and venture capital,
which we'll cover in-depth shortly, an early investment could mean a 10x+ return.
The outsized gains are partly due to special access but primarily because of the
expertise behind many investment irms in the alternative investment space. These
irms are founded and run by those with extensive experience and deep networks in
the area. For example, a real estate private equity irm can judge a project's timeline
and cash low potential. Likewise, a venture capital irm focusing on early-stage
growth companies knows what strong potential looks like in those early stages and
can leverage industry contacts to facilitate growth for investors.

• Di erentiated access. While publicly traded stocks can be easily bought and sold
every day with low to zero commissions, many proprietary alternative investments
are not easily accessible. Top performing irms and funds are typically
oversubscribed as they raise their next funds. Co-investing with groups that have
unique access requires preexisting relationships.

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 CATEGORIES OF ALTERNATIVE INVESTMENT ASSET
CLASSES
While many investable alternative products exist, the core of a comprehensive, risk-
adjusted portfolio often centers around some or all a few distinct and commonly known
categories. In general, alternative investments as part of a sophisticated portfolio are
delineated by:

1. Active management
2. Accessible to an elite class of investors, often accredited investors,
with a high minimum investment requirement.
3. Most importantly – low correlation to public markets.

When considering the spectrum alternatives as part of a diversi ied portfolio, investors
often look to the following categories.

VENTURE CAPITAL AND PRIVATE EQUITY

Venture Capital is arguably the cornerstone of the American institutional investor's
central thesis. After all, entrepreneurship and private enterprise created today's iconic
companies such as Apple, Amazon, Google, Microsoft, and many more.

VC/PE is increasingly attractive to a broad investor set and not restricted to tech
millionaires or insiders anymore. According to research conducted by UBS, in 2021, 80%
of family o ices report investment in private equity and venture capital:

Family o ices mainly invest in expansion or growth equity,

yet they’re making earlier-stage investments as equity stakes
get more expensive. Three quarters (75%) of family o ices
invest in expansion and growth equity. 85% declare that they’re
likely to invest at earlier stages of a business’s lifecycle in 2022,
up from 74% in 2021. This is also re lected in the increased
popularity of venture capital: 63% state that they usually
invest in venture capital, up from 61% in 2021 and 53% in
2020.

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 US respondents with private equity investments are most likely
to invest in venture capital (73%) and A sia-Paci ic investors the
least (46%). A reasonably high 42% of family o ices invest in
leveraged buyouts and 21% in distressed buyouts. In the age of
the tech economy, the deal pipeline is packed with potentially
transformative innovation. Consequently, technology is the
most common sector for private equity investments, with 82%
investing currently.

When evaluating direct deals, the most common consideration

is the expected return on investment, according to two thirds of
family o ices with private equity investments (67%). However,
half cite a wide range of factors, indicating the breadth of their
due diligence.

HEDGE FUNDS
Created to hedge against market risk through inancial engineering and unique
strategies, "hedge fund" now refers to a broad class of privately managed wealth
management houses. Hedge funds use methods like short selling and complex derivative
packaging but also invest in stocks, bonds, and alternative investments.

REAL ESTATE AND REAL ESTATE INVESTMENT FUNDS

Real estate is what many think of when they hear "alternative investing." Investment in real
estate is guaranteed to provide returns over a long enough time horizon and can
generate perpetual cash lows through renting. Real estate is also non-correlated with the
market, providing a valuable bu er against the economy. Real estate investment funds
o er many bene its while reducing risk for investors unable or unwilling to invest in real
estate directly. These real estate funds pool investors' money to purchase land, property,
and facilities while assuming the burden of management on behalf of investors, leaving
them free to reap the returns.

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PRIVATE DEBT
Common investments in private debt include:

• Direct lending
• Buying up distressed debt from falling companies
• Mezzanine nancing that consists of complicated debt-to-equity conversions.

At its most basic, all involve an investor or group of investors lending money to
companies (often in inancial straits) with an expectation of standard principal repayment
and periodic interest payments.

COLLECTIBLES AND PRECIOUS METALS

Collectibles include tangible goods that have, or are expected, to increase in value – art,
baseball cards, wine, and others. Collectibles and precious metals make up a
comparatively small allocation in most professionally managed portfolios, although both
have their place. Collectibles can be an excellent alternative investment for someone
already passionate about their collected assets.

Precious metals are also a mainstay for cash-adverse investors as gold

generally retains value well over time, although short-term volatility can be devastating.
Access to reliable metal dealers is tricky, as many might charge a premium and high
purchase fees that a ect pro it margins.

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CONCLUSION
A choppy economy and abysmal equities market make traditional portfolios poor
guarantors of return, and in lation means sitting on cash is the same as burning it for
warmth. In this unique but pervasive environment, alternative investments are
increasingly the recommended course of action for sophisticated, wealthy individuals
seeking capital gains, diversi ication, and risk-adjusted return.

Venture capital and private equity are not subject to the Fed's whims like stocks and
bonds, bubble risks like real estate, or questionable practices like many hedge funds.
Instead, VC/PE relies on a deep bench of knowledge and expertise to guide strategic
investments in quality companies.

By leveraging VC/PE, investors open new vistas to generate returns in the face of a
shaky economy in exchange for postponing liquidity.

VC and PE expose investor capital to the "best of the best" in startup companies and
similar ventures, as those able to withstand the current crucible are likely to remain viable
over time – especially those nimble enough to adapt and change with the economic
tides.

The technological age also increases the attractiveness of VC/PE investing. With rapid
innovation the norm, often from small startups, early exposure to these companies
through VC/PE increases the likelihood of massive bene its through tails. While due
diligence is increasingly important when considering VC/PE investing, alternative assets
are increasingly making up a signi icant portions of a family o ice portfolios in today's
troubled times.

FURTHER INSIGHTS
TO CONNECT AND LEARN MORE, PLEASE WRITE TO INVEST@VENTURE-SCIENCE.COM

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DISCLOSURES

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ALTERNATIVE INVESTMENTS AND HEDGE FUNDS INVOLVE A HIGH DEGREE OF RISK AND CAN BE ILLIQUID DUE TO RESTRICTIONS ON
TRANSFER AND LACK OF A SECONDARY TRADING MARKET. THEY CAN BE HIGHLY LEVERAGED, SPECULATIVE AND VOLATILE, AND AN
INVESTOR COULD LOSE ALL OR A SUBSTANTIAL AMOUNT OF AN INVESTMENT. ALTERNATIVE INVESTMENTS MAY LACK
TRANSPARENCY AS TO SHARE PRICE, VALUATION AND PORTFOLIO HOLDINGS. COMPLEX TAX STRUCTURES OFTEN RESULT IN
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INFORMATION ABOUT PUBLIC COMPANIES. PRIVATE EQUITIES TYPICALLY HAVE A LONGER TIME HORIZON THAN PUBLIC EQUITIES
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GENERALLY INVESTMENT VEHICLES THAT OFFER TYPICAL HEDGE FUND STRATEGIES IN A MUTUAL FUND FORMAT WITH DAILY
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