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 A report showing a well-rounded picture of an investment has much less value if the information is out-of-date.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
Current Insights on Real Estate Sectors
by firstname.lastname@example.org (Caitlin McMahon) on May 23, 2018 at 1:12 pm
Below are a few key takeaways from FactRight’s Q1 2018 U.S. market analyses and commercial real estate research; if you want to learn more, you can download the full-length sector insight reports (retail, industrial, multifamily, healthcare, hospitality, and office) from FactRight’s Report Center. […]
Meet the FactRight Team – Leah Berend
by Leah Berend on May 17, 2018 at 2:02 pm
FactRight’s team is full of talented people, bringing a diverse set of perspectives to bear on the issues that professionals and their clients confront in the alternative investment space. Over the next several weeks on this blog, we’ll talk to FactRight staff about the roles they play at FactRight, their current projects, and what recharges them outside of the office. In this post, we chat with Leah Berend, our office manager and staff accountant.&nbs […]
FactRight’s Take on American Realty Capital New York City REIT’s Proxy Proposals
by Jacob Heidkamp on May 9, 2018 at 5:05 pm
American Realty Capital New York City REIT, Inc. (ARC NYC) recently put forth a slate of proxy proposals seeking to amend its charter. Some of the proposals would impact key shareholder protections and rights contained in the charter. FactRight has analyzed these proxy proposals in light of recent developments at ARC NYC, and we discussed our findings and recommendations in a recent webinar presentation, which you can access at this link or below.&nbs […]
What’s in Your EBITDA?
by Jacob Mohs on May 7, 2018 at 2:56 pm
EBITDA is a controversial financial metric widely used in the private equity and leveraged credit space. One would think the calculation of EBITDA would be straightforward—it’s right there in the name: “Earnings Before Taxes Interest Depreciation and Amortization.” Yet when credit markets are hot, borrowers start to get creative with EBITDA calculation.&nbs […]
Get More Out of Property Visits for DSTs and Other Real Estate Programs
by email@example.com (Brandon Raatikka) on May 3, 2018 at 3:33 pm
Physically inspecting the underlying real estate before making investment recommendations to clients is important for many reasons. Visits can allow you to verify sponsor disclosures about the property and location, identify risks relating to neighborhood trends, and observe the condition and operation of the property first hand. And then there are the compliance reasons. FINRA Regulatory Notice 10-22 cites “[v]isiting and inspecting a sample of the issuer’s assets and facilities” as what can constitute a reasonable due diligence investigation for broker dealer firms. Property and onsite visits to confirm sponsor disclosures about investments and strategies also fit within customary RIA due diligence practices observed by the SEC. […]
Interval Fund Space Becomes More Crowded As It Expands
by Jacob Mohs on April 30, 2018 at 2:25 pm
Interval fund AUM continues to grow. Total interval fund net assets equaled $21.2 billion as of the most recent public filings, up 58% compared to the prior year, and 7% compared to the prior quarter. […]
What FactRight Does for Fun in Minnesota
by firstname.lastname@example.org (Brandon Raatikka) on April 27, 2018 at 4:44 pm
It’s late April, which means the Annual Thaw is on here in Minneapolis. &nbs […]
Find Clarity Around Private Direct Participation Programs
by email@example.com (Russell Putnam) on April 24, 2018 at 10:00 am
Last December, we began a 5-part blog series to bring greater understanding to the regulations, risks and due diligence considerations relating to private placements. These proved to be very popular posts, as an increasing number of advisors are appreciating the role that private direct participation programs can play in enhancing and diversifying the portfolios of their high net worth clients. […]
An Unfortunate Reminder of the Importance of Sponsor Succession Plans
by Kate@FactRight.com (Kate Stephany) on April 19, 2018 at 7:03 pm
Earlier this week, Preferred Apartment Communities, Inc. (PAC), a notable issuer in the alternative securities industry, unexpectedly lost its founder, chief executive officer, and chairman John Williams. Mr. Williams was known to many in the business, although his influence extended far outside the industry. In FactRight’s interactions with him, we found Mr. Williams to be engaging and courteous, consistent with his high reputation. […]
Reg A+ at a Crossroads
by firstname.lastname@example.org (Brandon Raatikka) on April 17, 2018 at 6:29 pm
The most recently quarterly results show that the Reg A+ space has never been more active. In the first quarter of 2018, the SEC qualified new Tier 2 offerings for 26 issuers. Since the end of 2015, when rules enhancing Regulation A went into effect, 157 Tier 2 offerings (not including those that were subsequently withdrawn or used for merger purposes) came to market. This compares to just 27 qualified offerings under the old Regulation A in the four years prior to the end of 2015. […]