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 A report showing a well-rounded picture of an investment has much less value if the information is out-of-date.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
Tax Reform’s Effects on Real Estate Investment Programs
by firstname.lastname@example.org (Kemp H. Hanley) on January 11, 2018 at 8:54 pm
The passage of tax reform —the Tax Cuts and Jobs Act of 2017—will undoubtedly reduce the uncertainty that has weighed on commercial real estate investors as major tax proposals have been contemplated, which in and of itself is a benefit. Now that the final provisions are known, the Act has been lauded by many as a great boon for commercial property owners. Some analysts have predicted the newly amended tax code should specifically strengthen demand in the multifamily sector and incentivize corporations into putting more capital into real estate assets and new development. Of course, it is difficult for us at this time to determine exactly how the effects of tax reform will play out long term for the alternative investment industry, and what the unintended consequences will prove to be. […]
Private Placements Explained: Part 5 (Key Risks)
by email@example.com (Russell Putnam) on January 9, 2018 at 9:07 pm
Let’s wrap up our five-post discussion of private placements by exploring some key considerations that often present risks in Reg D programs. […]
Private Placements Explained: Part 4 (Fees and Expenses)
by firstname.lastname@example.org (Russell Putnam) on January 3, 2018 at 4:16 pm
Happy New Year! Last month, we launched a series of blog posts on private securities offerings, which you can read here (Regulation D), here (distribution waterfalls), and here (differences between public and private direct participation programs). Let’s continue our discussion of private placements by exploring typical fees and expenses for private programs. […]
Private Placements Explained: Part 3 (Public vs. Private)
by email@example.com (Russell Putnam) on December 27, 2017 at 10:02 am
Earlier this month, we launched a blog series on private placements, looking at Regulation D itself in Part 1, and distribution waterfalls in Part 2. Let’s continue our discussion of private placements by approaching them from a reference point most of our clients are familiar with, and compare private direct participation programs to their public, non-traded cousins. […]
Not All REIT Leverage Ratios are Calculated Equal
by firstname.lastname@example.org (Kemp H. Hanley) on December 20, 2017 at 2:27 pm
We sometimes receive questions regarding the leverage ratios for non-traded REIT programs that FactRight uses in its analysis, given that they are not as favorable the same as the leverage ratio such programs have published in their SEC filings or other material. And to a certain degree, these questions are appropriate. The complicating factor is that not all leverage ratios are created equal. While “leverage ratio” sounds like it should be fairly straightforward on its face, if you dig a little bit into program disclosures and calculations, you find that it means different things to different issuers. […]
FactRight 2017 Holiday Due Diligence Report
by email@example.com (Brandon Raatikka) on December 15, 2017 at 6:55 pm
Happy Holidays from FactRight! In appreciation of your support this year, your FactRight 2017 holiday card/due diligence report is here! […]
Private Placements Explained: Part 2 (Waterfalls)
by firstname.lastname@example.org (Russell Putnam) on December 12, 2017 at 6:52 pm
Last week, we looked at exemptions to registration under Regulation D itself in Part 1 of the blog series on private placements. Let’s continue our discussion of private placements by exploring distribution waterfalls in Reg D programs. […]
Private Placements Explained: Part 1 (Reg D)
by email@example.com (Russell Putnam) on December 7, 2017 at 9:55 pm
Over the past year or so, FactRight has seen an increase in the number of private placements in the retail space alternative space as sales of public, non-traded products decline. While many in the industry have a good understanding of the differences public and private investment programs, it is easy to overlook the actual regulation that allows for private placements, Regulation D, and the impact the regulation has on program design. […]
What Conservation Easement Listing Notice 2017-10 Means For You
by firstname.lastname@example.org (Russell Putnam) on December 5, 2017 at 4:25 pm
Listing Notice Overview A year ago, the IRS published Listing Notice 2017-10, which notified taxpayers that they will be treated as having participated in a listed transaction under Section under Section 6111 and 6112 of the Internal Revenue Code and Section 1.6011-4(b)(2) of the Treasury Regulations if they invest in a syndicated conservation easement transaction where the charitable contribution deduction amount significantly exceeds the amount invested. In other words, the IRS identified syndicated conservation easement transactions as reportable tax avoidance transaction, and failure to report such transactions can have serious tax consequences. The listing notice also specified certain disclosure requirements for taxpayers and material advisors who are involved in such listed transactions.&nbs […]
Quick Take on UDF’s Claims Against Kyle Bass
by Jacob Heidkamp on December 1, 2017 at 5:42 pm
Earlier this week, the UDF family of funds (consisting of all the non-listed United Development Funding investment programs syndicated through the retail broker dealer channel, among others) filed suit against J. Kyle Bass and Hayman Capital Management, L.P., and affiliates, based on multiple counts described below. We have received questions from a few clients regarding this matter, and anticipate more questions will be forthcoming. Here’s what we can say at this point. […]