High-net-worth families have long understood the value of alternative investments. Now there’s a growing sense that the artificial intelligence (AI) revolution is the next big opportunity, even as it comes with major risks. Many just don’t know where to start.
Wealthy families seek to diversify their investments to protect capital, and alternatives play a large role, as there is less correlation to the stock market. What’s more, direct investments require a long-term investing horizon. Diversification helps portfolios over time, and alternative investments can serve as a hedge in market downturns.
AI is shaping up to be more than just a trend. While investment fads such as NFTs and the metaverse have fallen off investors’ radar, AI and its generative uses are here to stay. Global spending on artificial intelligence, including software and hardware, will top $300 billion in 2026, up more than double that of 2022, according to research company IDC. As a result, there are opportunities for investing in the burgeoning sector.
Where to begin?
High-net-worth individuals and families have several options of where to begin, ranging from direct investment in a single startup to shares in large, publicly traded companies or funds. There are more private companies than public ones, according to McKinsey & Company, which is important because this leads to a bigger pool of investment opportunities. Investors with the wherewithal to get in on these investments may stand to benefit. It’s a matter of risk appetite.
Sector funds that focus on AI technology pose more risk, but because they invest in a range of companies, they’re diversified.
Private equity companies with some or all of their assets invested in AI technology are an even riskier, but potentially more lucrative, way of getting in the game. These firms do the research on their investments, but there’s typically little transparency, and fee structures tend to be steep.
Directly investing in a privately held AI company is only for those who can afford to lose their entire investment. It’s the riskiest route, but holds the greatest chance for the largest reward.
Competition is a major risk for any startup company. Competitors are always looking to make a better version to call their own. But if an early-stage company is bought out by a more established competitor, the return on investment can be exponential.
Keep in mind that liquidity can be a factor
Liquidity risk is a factor with early and mid-stage companies, no matter the sector. Investors may not have access to their money for several years, which can pose problems if the need to make a large purchase arises.
There’s also a scarcity of publicly available information about private companies as investment opportunities because private firms don’t have to disclose everything they’re doing and are exempt from listing requirements.
Private equity investors in AI must rely on third-party experts to conduct due diligence associated with their investments, since investors don’t have the same access to information as these industry experts.
So, how do you find a competent financial adviser with access to a wide variety of investment options? It can be challenging.
It’s also not easy to be sure an adviser is properly equipped to judge the merits of these types of investments, especially from a distance. Checking records for past complaints, making sure the adviser is taking advantage of continuing education opportunities and credits and reviewing client lists and retention rates are some ways to measure competence and ethics.
Fees are another factor. These can go up exponentially as investments get further removed from publicly traded companies or exchange-traded funds (ETFs), and many fees are charged upfront. Big returns are great, but what’s most important are larger returns net of fees.
Mixing risk profiles and time horizons
Every investor’s risk profile is different. As a result, it’s prudent to lump investments into three pools: one with a time horizon no longer than 10 years, another for 11 to 20 years and a third that’s meant to stay put for more than 20 years. AI technology investments can be mixed in with more traditional assets, such as stocks and bonds, which carry different risk profiles and time horizons.
With any new trend, it can help to follow the lead of large investors. Endowments and foundations are often the first to invest in new and different spaces — forestry was big for a time — and high-net-worth families tend to be next. AI is just the latest wrinkle.
As Warren Buffett said in his 1986 letter to shareholders, the aim with investing is to “be fearful when others are greedy and greedy when others are fearful.” That’s a hard thing to do, but it underscores the importance of a balanced approach.
Tom Ruggie, ChFC®, CFP®, founded Destiny Family Office, a Destiny Wealth Partners firm, to help clients manage the increasing complexities inherent in their business and personal lives. He has identified three key areas where his firm can make a significant difference: presenting a compelling sphere of investments, including alternative, direct and co-investment opportunities; creating a special emphasis on high-end collectors whose collections signify significant alternative investments; and strengthening the firm’s private trust capabilities. Ruggie has become one of the most respected financial advisers in the industry, receiving national recognition and rankings including: 11X Barron’s Top 1200 Financial Advisors, 6X Forbes/Shook Research Best-In-State Wealth Advisors (2023: 5th in North FL), 12X Financial Advisor Top RIA Firms and Forbes Finance Council 2016-2023.
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