In recent years, we have seen investor interest in alternative investment products and venture capital. They have taken their place among the avenues for wealth planning, which have evolved to incorporate these strategies more in line with the current landscape, moving away from other more traditional approaches. These assets are often proving to be a key element in the structuring of investment portfolios, but the decision whether to include them or not requires an in-depth analysis of each investor or family group. It also calls for expert advice, not only for the product selection, but also to confirm that it meets the wealth and family objectives.
A number of factors have contributed to the rise in these products and their incorporation into portfolios. On the one hand, the easing of regulations to give practically all types of investors access, under certain conditions, to these investment opportunities that were previously limited to the most qualified investors. And on the other, the advantages, from a tax point of view, that some of these investment products offer, which maximises their profitability.
In view of the taxation of investments, we cannot ignore the fact that venture capital is the major beneficiary of the special tax regime that accompanies this type of vehicle and the taxation associated with some of its investors, particularly in those cases related to Spanish venture capital investment instruments. Furthermore, we cannot overlook the benefits that could be accessed in relation to capital gains tax or the temporary solidarity tax on large fortunes and, consequently, inheritance and gift tax. This is undoubtedly one of the aspects that has contributed to sparking investor interest in this type of investments.
However, the inclusion of venture capital products and other alternative investments in portfolios is a strategic decision that requires a detailed evaluation of the specific situation of each investor or family group. We agree that the aim of wealth planning is to optimise the management of resources in order to achieve financial objectives and preserve wealth for it to be passed down to future generations. This goal is in line with this type of assets with long-term investments and high returns, but it also entails risks that must be understood and assessed. This is why, before incorporating these assets, we will need to make a prior assessment of both the investor and the type of investment to be proposed.
Some aspects to consider include the time horizon, the tolerance to risk, the investor’s level of knowledge of this type of investments, as well as the weight they should have in the portfolios.
Alternative investments, such as venture capital, by their very nature, generally involve long investment periods related to the maturity of the investments, so short-term liquidity needs should be properly analysed. It will also be necessary to assess the investor’s tolerance to risk. It is well known that these types of products, which are not always easy to understand, often carry a higher risk than more traditional assets, and therefore this risk assessment, together with the investor’s knowledge, is essential. Finally, we must determine the weight that these assets should have in the portfolio depending on the criteria analysed, as well as the amount that will need to be invested in order to diversify properly.
To sum up, the inclusion of venture capital products and other alternative assets in portfolios from a wealth planning perspective must be based on a careful assessment of all the above factors. Working with a professional and with as much information as possible will be the cornerstone for a successful investment in these alternative investment assets.
Published in Citywire, 03.04.24