Anything not a stock, bond, or cash investment is generally considered an alternative investment. Examples of common alternative investments include hedge funds, real estate investment trusts (REITs), private placement funds, closed-end 40 Act funds, and Reg A companies seeking capital.
Like a traditional stock or bond investment, alternatives have their pros and their cons. Disadvantages include the potential for high initial fees, less liquidity, and a longer investment horizon. But alternatives also can have distinct advantages over the traditional investment market, such as lower correlation to the broader markets, tax benefits, or protection against inflation. For the right investor or financial advisor, alternative investments can be a useful tool to diversify a portfolio.
When looking to outsource due diligence, you want to be sure you are getting a complete, unbiased picture of the investment or sponsoring organization. Good questions to ask are: How does the due diligence provider work with the sponsor? What other information sources do they use? What types of experts do they employ and what are their specific areas of expertise? Finally, what time frame can you expect to see information in? A report showing a well-rounded picture of an investment has much less value if the information is out-of-date. FactRight delivers up-to-date information that can be used to guide decision-making today.
This concern is very valid. Third party due diligence is often paid for directly by product sponsors, and the users of the report (the financial service professionals who work with alternatives) receive the information for free. Regulatory agencies have historically accepted seller-funded diligence as long as it remains impartial. We believe, however, that this method may come under increased scrutiny by regulators as the financial services industry more widely adopts fiduciary standards and principals.
How does FactRight remain impartial? By scrutinizing every piece of information available. Our financial and legal experts dissect the sponsor or offering, looking specifically for gaps in information or questionable interpretations. We also bring in data from other market-relevant sources to create a holistic, unsentimental picture of the sponsor/offering.
Once factual review is complete, the sponsor is allowed to verify the accuracy of the data from an abridged draft report—one without any discussion of risks, strengths, or conclusions or recommendations. Suggestions on this material are only considered if the sponsor can provide significant supporting evidence. When the report is finalized—including our overall findings—it is published on our Report Center, to which the sponsor does not have access.
For financial services firms that are interested in requesting their own sponsor-free due diligence reviews and platform recommendations, we offer our custom FR Risk Management service.
No one can keep their eye on everything all the time. FactRight’s team of financial and legal experts are always watching and reviewing the constantly changing environment of alternative investments so that you don’t have to.
At FactRight, we specialize in understanding and explaining the complex world of alternative investments. We determine where an investment is strong or risky and explain how fluctuations in regulations or the market will affect those investments. This is all we do and we do it well. Partnering with FactRight allows you to focus on the specific needs of your business and the individualized needs of your clients.
Recent Blogs from FactRight
First Capital Investment Corp. Director Goes Out in Blaze of Glory
by Jacob Mohs on March 19, 2018 at 6:30 pm
Usually when a director resigns from a board of a public company, the company puts out a boilerplate filing saying that the director is not resigning as a result of any disagreements with management. However, in rare cases there are fireworks. Pursuant to Item 5.02 (a) of Form 8-K, a disagreement leading to director resignation generally triggers disclosure obligations. The company is required to, among other things, describe the disagreement and file correspondence related to the resignation as an exhibit to the 8-K. Companies seeking obfuscation often file this info as part of an 8-K with a headline about something else. […]
What to Make of Cash Out Transactions in DSTs
by firstname.lastname@example.org (Brandon Raatikka) on March 14, 2018 at 6:45 pm
A few sponsors we follow have arranged for cash out transactions in DSTs they have recently syndicated in the retail channel, which has turned the cash out concept into a hot topic with our clients. The IPA’s Direct Insights Call on DSTs last month addressed these new structures. So what are we to make of them? Is it even accurate to call these transactions “refinancings,” which is how they are referred to around the industry? […]
Healthcare REITs Hurt by Changing Government Reimbursements
by Jacob Heidkamp on March 2, 2018 at 3:47 pm
Changes in government healthcare reimbursements may be beginning to have an impact on some large non-traded REITs. […]
IPA Discussion All About DSTs
by email@example.com (Brandon Raatikka) on February 27, 2018 at 8:30 pm
FactRight’s own Jake Heidkamp moderated the latest installment of the Investment Program Association’s Direct Insights Call Series: Leveraging 1031 Exchanges to Enhance Tax Advantage Returns, held last Thursday. &nbs […]
SEC Crackdown on Share Class Selection Abuses
by Jacob Mohs on February 20, 2018 at 8:03 pm
Last week, the SEC enforcement division announced that it would take aim at advisor failure to disclose conflicts of interest related to receiving 12b-1 fees when lower-cost mutual fund share classes are available to clients. This Share Class Selection Disclosure (SCSD) initiative reflects the Commission’s longstanding focus on conflicts of interest inherent in selecting mutual fund share classes. How long will it be until regulators leverage similar considerations in interval fund and non-traded REIT contexts? […]
Sector Outlooks (Q4 2017) Insights on Real Estate Sectors
by firstname.lastname@example.org (Caitlin McMahon) on February 15, 2018 at 11:41 am
Each quarter, FactRight publishes sector insight reports regarding the various facets of commercial real estate. These sector insights help broker dealers and RIAs stay informed about the health of each commercial asset type, as well as assess which real estate-related alternative investment products may be right for their platforms. Below are a few key takeaways from FactRight’s Q4 2017 sector research; if you want to learn more, you can download the full-length sector insight reports from FactRight’s Report Center. […]
SEC and FINRA Examination Priorities and Alts
by email@example.com (Brandon Raatikka) on February 13, 2018 at 4:16 pm
Last week, the SEC published its 2018 examination priorities. In January, FINRA published its 2018 examination priorities letter. Each year, we review both examination letters to determine how regulatory focuses may impact our clients’ alternative investment-related practices. Although neither the SEC nor FINRA mentions ‘alternative investments’ by name in this year’s priorities, it’s clear that AI considerations are lurking not too far under the surface. […]
Typical Fees and Metrics in DST Offerings
by firstname.lastname@example.org (Brandon Raatikka) on February 7, 2018 at 10:05 pm
So far in 2018, we at FactRight have been kept very busy reviewing DST offerings for our clients, including deals from new sponsors entering the market. Recent tax reform spared section 1031 exchanges for interests in real estate, and the industry breathed a sigh of relief, as it expects demand for syndicated deals will continue to grow. Our friends at Mountain Dell Consulting report that 29 sponsors raised more than $1.9 billion in aggregate equity in 2017, making it the most active year for syndicated 1031 offerings since 2007 (during which $2.8 billion was raised by 64 sponsors). The sentiment appears to be that the growth we’ve seen in the overall market since 2011 will continue into the foreseeable future. […]
Interval Fund Market Update
by Jacob Mohs on January 31, 2018 at 2:36 pm
A robust pipeline of new interval fund registrations indicates continued growth is likely throughout 2018. Total interval fund assets now exceed $23.8 billion. Total net assets for the sector grew 56% over the most recent 12-month period, to $19.9 billion. Although newly launched funds are gaining momentum, the sector is highly concentrated in the top 10 funds. […]
FINRA Set to Draw a New Line for Hybrid BDs
by email@example.com (Scott Smith) on January 25, 2018 at 8:14 pm
FINRA’s board took an unusual step at its December 2017 meeting that could have a big impact on alternative investment products. […]