Brett Hillard, CAIA, CFA, Chief Investment Officer at GLASfunds
James Ouderkirk, CFA, CPA, Executive Director at GLASfunds
As more and more advisors add private investments to their clients’ portfolios—91% of advisors plan to increase their allocations to alternatives over the next two years1— they may feel they face a polarizing choice: strategies that look to deliver steady streams of income, or highly illiquid, long-term strategies shooting for higher returns.
But it doesn’t have to be an either / or proposition.
With the right alternatives strategies, advisors have the opportunity to deliver both reliable income in the near- term, as well as highly attractive long-term returns for their clients relative to traditional markets.
As investors’ private market allocations grow, identifying opportunities with both income and liquidity in today’s market is increasingly important, as it is taking longer for strategies such as private equity, venture capital, and real estate to generate distributions to investors.
As an example, real estate funds from 2015 returned, on average, nearly two thirds of investors’ capital after five years. By 2019, these same types of real estate investments returned less than 40% of investor capital over a five-year period, with low expectations for this to improve in future years2.
Strategies that lend money to large private companies have established themselves as an area within alternatives that have historically delivered strong returns and reliable distributions.
However, increased competition for these deals means investors will need to expand their investment horizons to secure higher returns with compelling income streams.
The following outlines three strategies we believe are well positioned to do that in the current environment:
Hybrid capital solutions
Blending traditional debt investing with equity, hybrid (or junior) capital solutions refer to debt investments with lower recovery potential on a company’s assets or earnings in a bankruptcy scenario, but that can provide high income payments along with equity like upside. Examples of these types of investments include convertible debt, convertible preferred equity, or debt with equity “kickers,” such as warrants.
Junior capital typically provides companies with more flexibility in how they finance operations to achieve certain initiatives. In exchange for the flexibility, investors can receive a mix of debt like attributes such as income payments with equity like attributes that allow for higher returns if the company is successful. This strategy has become attractive as exits through IPOs or to large strategic buyers have slowed for larger private companies.
These solutions can also be leveraged by public companies looking to simplify their balance sheets or efficiently buyout blocks of minority shareholders. Cash coupons on these investments can range from 7% to 11%, while additional fee income, preferred dividend payments, equity accruals and warrants have the potential to increase total returns in these strategies to 15% to 18% if companies continue to perform well.
Buyout strategies that focus on cash flowing businesses
This strategy can produce steady income similar to dividend- paying stocks. Sponsors typically target mature industries with stable growth trajectories and significant free cashflows.
As sponsors may use little to no debt in acquiring the business, the focus can remain on delivering attractive returns through operational improvements and growing cash flow distributions to investors. If the sponsor is able to improve the business’ operating performance and expand efficiently, investors can be rewarded with a ramping cash flow profile and meaningful exit opportunities at higher values.
Businesses that fit this profile include quick service restaurants (QSRs) or commercial and residential real estate services businesses (plumbing, electrical, etc).
We feel the QSR industry is particularly interesting for growth and income-oriented investors, as these businesses have demonstrated resilience across a wide range of economic conditions and can be owned at relatively high (often 10%+) cash-on-cash yields.
Real Estate Lending
Within real estate, we believe that prospective returns for high- quality debt investments are currently comparable to many equity strategies, with better downside protections along with current income.
Based on data from NCRIEF, “cap rates” (the net operating income yield measure for real estate equity) were just below 6% for commercial real estate at the end of the first quarter of 2025.
Adding this to reasonable long-term rent growth expectations of 2% to 3% suggests returns for commercial real estate equity at 8% to 11%, depending on the degree of leverage used to purchase existing property.
At the same time, we are identifying many real estate debt strategies with prospective returns of 12% or higher. This is resulting because of structural imbalances in supply and demand for credit and unique tax advantages of certain loan programs.
While investors should be aware that there are wide dispersions in commercial real estate, we are concentrating on the areas of affordable multifamily, data centers, hospitality and leisure, and data centers that we view as having more favorable prospects.
1 “The State of Alternative Investments in Wealth Management 2025” CAIS & Mercer
2 Hamilton Lane
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