Alternative Income Sources for the Modern Investor

For over a decade following the 2008 global financial crisis, income investors faced a genuine crisis. UK base rates at 0.1%, 10-year gilt yields below 1%, and savings account rates effectively at zero meant that the traditional toolkit — government bonds and cash deposits — delivered next to nothing. Investors reached for yield in increasingly illiquid, complex, or risky instruments.

The rate normalisation of 2022–2024 changed the picture dramatically. Gilts now yield 4–4.5%, investment-grade corporate bonds 5–6%, and high-yield bonds 7–9%. Cash and money market funds pay near base rate. The immediate yield problem has eased.

But for investors who need income above inflation over a 20–30 year retirement, or who seek genuine portfolio diversification from the equity-bond cycle, alternative income sources remain important. This guide maps the landscape clearly — including the risks that some investors downplay.

Infrastructure income funds

Infrastructure companies — operators of toll roads, airports, water treatment plants, electricity transmission networks, and social housing — typically generate revenues under long-term government-backed contracts with built-in inflation linkage. This profile creates an income stream that is:

• Long in duration (contracts often run 25–50 years)
• Partially or fully inflation-linked
• Largely uncorrelated to economic cycles (people use electricity and water regardless of GDP growth)
• Predictable, though not entirely certain (regulatory resets occur; construction risk exists)

The UK's listed infrastructure sector is among the most developed in the world. Key vehicles:

HICL Infrastructure: a FTSE 250-listed investment company investing in operational infrastructure projects globally — roads, schools, hospitals (under PFI contracts), rail, and utilities. Yield approximately 5–6%; NAV discount/premium fluctuates. Long-run track record of inflation-linked dividend growth.

3i Infrastructure: invests primarily in mid-market infrastructure businesses across Europe; a more equity-like risk profile than pure PFI infrastructure. Yield approximately 3–4%; stronger capital growth component.

BBGI SICAV: conservative infrastructure mandate; heavily weighted to availability-based (non-demand risk) assets. Yield approximately 5–6%.

The post-2022 rate rise environment has pressured infrastructure fund valuations. Rising discount rates reduce the present value of long-duration cash flows — the same mechanism that hurt long-dated bonds. Several funds traded at discounts to NAV of 15–25% in 2023–2024. For long-term income investors, these discounts can represent opportunity; for short-term holders, they created losses.

Private credit: the direct lending opportunity

Private credit — loans made directly by investment funds (rather than by banks) to mid-market companies — has grown into a $1.5 trillion+ global asset class since the 2010s. As banks pulled back from leveraged lending post-2008 due to regulatory constraints, non-bank lenders stepped in, offering attractive yields in exchange for the illiquidity premium.

Typical returns in the UK/European direct lending market: 7–12% gross (SONIA + 5–8% spread), depending on leverage, credit quality, and deal type. The catch: these loans are not publicly traded. They are illiquid — investors are locked in for the fund's term (typically 5–7 years) and cannot sell early without significant haircut or at all.

For institutional investors and HNW investors with sufficiently long time horizons and appropriate risk tolerance, private credit funds (offered by managers such as Ares, Blue Owl, Intermediate Capital Group, and Barings) have historically provided strong risk-adjusted returns with low correlation to public markets. The default experience has been better than high-yield bonds historically, partly due to the senior secured nature of most direct loans.

The caveat: the 2023–2024 rising rate environment stressed some highly leveraged borrowers. "Zombie" borrowers — companies that can service but not repay their debt — became more common as refinancing became expensive. The true default experience of the 2020–2022 vintage private credit funds will only be known as loans mature and are renegotiated.

Listed closed-end alternative income funds

The UK investment trust sector includes a substantial cohort of alternative income funds — listed investment companies with portfolios of infrastructure, renewable energy, royalties, leased assets, or specialist debt. They trade on the London Stock Exchange and can be bought and sold like equities, providing a liquidity profile unavailable in the underlying assets they hold.

Renewable energy income funds: Greencoat UK Wind; Bluefield Solar Income; NextEnergy Solar Fund. Invest in operational UK wind and solar assets; revenues from Contracts for Difference (government-backed), Renewable Obligation Certificates, and merchant power prices. Yields 5–8%; inflation linkage varies. The power price component makes returns partly commodity-exposed.

Listed music royalty funds: Round Hill Music Royalties Fund and Hipgnosis Songs Fund — music royalty income vehicles — represent a distinctive sub-sector. Hipgnosis experienced significant governance difficulties in 2023–2024, including disputes over NAV valuations and management conflicts; the fund was subsequently acquired. This is an important cautionary tale: the attractive income proposition of a listed alternative does not insulate investors from governance risk in the vehicle managing the underlying assets.

REITs and property income trusts: addressed further in our dedicated REIT guide, but the income characteristics deserve mention here — UK REIT distributions are paid as PIDs (Property Income Distributions), taxed as property income rather than dividend income. This has materially different tax treatment, particularly for higher-rate taxpayers.

Royalty streaming companies

Royalty streaming — companies that purchase the right to receive a percentage of production from a mine, oilfield, or other resource project in exchange for upfront capital — combines commodity exposure with income characteristics.

Franco-Nevada, Wheaton Precious Metals (formerly Silver Wheaton), and Royal Gold are the major listed precious metals royalty companies. Their model: finance mining companies' expansion in exchange for a royalty stream (say, 1–2% of gold production from a specific mine for its life). The royalty company then earns income as metals are produced, without the capital expenditure, operating costs, or project risk of a mine operator.

The income is commodity-price linked — when gold prices rise, royalty income rises proportionally, with the additional operating leverage embedded in the mining company's margin. The portfolio diversification characteristics are distinctive: low correlation to bonds, partial equity market correlation, and a strong gold price sensitivity.

Realty Income Corporation (listed NYSE) applies the same royalty-adjacent model to real estate: triple-net lease properties where tenants bear all operating costs, providing stable, predictable monthly income to the REIT. Its nickname is "The Monthly Dividend Company."

Peer-to-peer lending and the IFISA

The Innovative Finance ISA (IFISA) allows individuals to hold peer-to-peer loans within an ISA wrapper, receiving interest income tax-free. UK P2P platforms including Crowd Property and Folk2Folk (both property-secured lending) have offered gross yields of 7–10% on property-backed loans.

The critical distinction from bank savings: P2P loans are NOT covered by the Financial Services Compensation Scheme. If the borrower defaults and the platform cannot recover the loan from the security, the investor loses capital. The track record of the P2P sector has been mixed: Funding Circle (business loans) has had a difficult performance history; several smaller platforms (including Lendy and Collateral) have failed entirely, leaving investors with significant losses.

Property-backed P2P lending (where the loan is secured against a physical property asset with a loan-to-value typically 60–75%) provides a layer of security that pure business lending does not — but is not without risk of loss in a falling property market.

The FCA in 2020 banned the mass-marketing of "non-readily realisable securities" — including mini-bonds — to retail investors, following several high-profile failures including London Capital & Finance, which collapsed in 2019 with losses to approximately 11,500 retail bondholders.

The discount/premium dynamic in listed alternatives

A feature specific to listed investment trusts and listed alternative income funds is their ability to trade at a discount or premium to net asset value (NAV). When rates were near zero, investors hungry for yield bid up alternative income trust prices to premiums of 10–20% above NAV. When rates normalised in 2022–2024, the same trusts fell to discounts of 10–30%.

For income investors, this creates an additional dimension beyond the yield of the underlying assets: the discount or premium is itself a return driver. Buying a well-managed infrastructure trust at a 20% NAV discount provides both the running yield and the potential capital gain if the discount narrows.

Compliance note

This guide is for informational purposes only and does not constitute personal financial or investment advice. Alternative income investments carry risks including illiquidity, credit default, regulatory change, and the risk of capital loss. Listed investment trusts can trade at discounts to NAV for extended periods. P2P lending is not FSCS-protected. Specific funds and vehicles mentioned are cited for illustrative purposes only; this is not a recommendation to invest. Always seek qualified independent financial advice before making investment decisions.

How Global Investments can help

Alternative income is an area where adviser-led due diligence adds significant value — the range of vehicles, their underlying risk profiles, liquidity characteristics, and tax treatment varies enormously. Our team reviews alternative income allocations within the broader portfolio context, assesses whether the yield premium justifies the additional risk and illiquidity, and helps clients avoid the governance and liquidity traps that have destroyed value in some high-profile cases. Contact us to discuss your income portfolio requirements.