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 A report showing a well-rounded picture of an investment has much less value if the information is out-of-date.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
Is the Conservation Purpose Protected in Perpetuity?
by email@example.com (Russell Putnam) on September 13, 2018 at 8:51 pm
Under the Internal Revenue Code, to be deductible, a conservation easement must be made exclusively for conservation purposes, which requires that the conservation purpose of the easement must be protected in perpetuity. This means that restrictions on the use of the property will run with the land, in theory, forever. The legislative intent behind the perpetuity requirement was to provide for a legally enforceable restriction on the property owner’s use, and any subsequent property owners’ use, of the property that would be inconsistent with the articulated conservation purposes that the easement is protecting. […]
Dr. Glenn Mueller's 2Q Real Estate Cycle Monitor
by Dr. Glenn Mueller on September 6, 2018 at 8:16 pm
With FactRight’s annual conference just around the corner, we thought we’d tease some of this year’s content by posting the latest real estate analysis from conference speaker Dr. Glenn Mueller. We’re excited for Dr. Mueller to share his insights with this year’s attendees. Dr. Mueller is currently Professor at the University of Denver’s Franklin L. Burns School of Real Estate & Construction Management and Real Estate Investment Strategist at Black Creek Group (with a full bio at the end of this post). His Q2 2018 Cycle Monitor is reproduced below. (For more of Dr. Mueller’s commentaries, visit Black Creek’s market insights webpage.) […]
Peer Comparisons for Non-traded REITs and BDCs
by firstname.lastname@example.org (Kemp H. Hanley) on August 29, 2018 at 7:42 pm
One of the most common lines of inquiry we get from clients is how particular investment programs they have, or may be considering for their platform, stack up against similar programs, or more broadly, of all of the alternative investment options of a particular class or type, which ones outshine their peers. These queries are fruitful not only for initial reviews but for ongoing monitoring of platform programs.&nbs […]
Why Rising Interest Rates Aren't Fatal to Commercial Real Estate Returns
by email@example.com (Brandon Raatikka) on August 27, 2018 at 6:04 pm
It’s understandable that private real estate investors would be sensitive to the relationship between interest rates and commercial property. Cap rates for many asset types are near all-time lows, and the Fed is eyeing more rate hikes in the short term. We share the concerns of many in the alternative investment industry that some syndication structures are not ideal for weathering a rising cap rate environment, especially those featuring underlying assets subject to long-term, bond-like leases. We’ve previously explored the relation between interest rates and commercial property returns on this blog here and here. […]
Sharpen Your Analysis of Programs Involving Conservation Easements
by firstname.lastname@example.org (Russell Putnam) on August 22, 2018 at 8:34 pm
As I’ll describe in this post, I’ve been busy this week helping to educate our clients on how conservation easements work in land investment programs, and I'd like to share some resources that may advance your understanding of these programs.&nbs […]
Reg A+ Quarter 2 Overview: High (and Low) Times
by email@example.com (Brandon Raatikka) on August 16, 2018 at 6:45 pm
A few months ago, we wrote that Regulation A was at a crossroads—SEC qualification activity of Reg A+ deals was at an all-time high, and while regulators were tinkering with ways to increase use of the exemption, issuer scandals were calling Reg A+’s long term viability into question.&nbs […]
Drilling Down on Mineral Valuations in Conservation Easement Programs
by firstname.lastname@example.org (Russell Putnam) on August 14, 2018 at 7:53 pm
Over the last few years, FactRight has reviewed a number of investment programs that offer investors a mining or conservation easement strategy. Specifically, investors could elect to cause the investment program to mine an underlying property for minerals, such as granite or limestone, which could produce cash returns to investors over a 20-plus year period. Alternatively, investors could elect to place a conservation easement on the property, which would limit the future use or development of the property and provide investors with a charitable contribution federal income tax deduction based on the value of the easement. […]
Why Onsite Visits are Essential for Sponsor Due Diligence
by email@example.com (Kemp H. Hanley) on August 9, 2018 at 7:11 pm
As an indispensable part of FactRight’s operational due diligence, one or two FactRight team members sit down with management face-to-face at their corporate headquarters. Others on the review team may join the meeting via Skype. We could easily cover the content of these interviews by phone or by email through written questionnaires (which we may do for follow-up interviews or when we’ve already recently met with management in their offices). However, it is very important to personally meet sponsor executives in their offices, particularly upon the start of a new engagement. One might say this is due diligence 101—we like to get a “feel” for the company culture and people who are considering raising capital in the retail channel. […]
Meet the FactRight Team - Brandon Raatikka
by firstname.lastname@example.org (Brandon Raatikka) on August 7, 2018 at 4:27 pm
For today’s Meet the Team post, we’ll profile Brandon Raatikka, FactRight’s resident historian. […]
Notes on American Finance Trust's Trading Activity
by Jacob Heidkamp on August 3, 2018 at 8:27 pm
On July 19, American Finance Trust, Inc. listed on the NASDAQ exchange (under the symbol “AFIN”). Since listing, the shares have traded in a range of approximately $13 to $17 per share., which represents a steep discount to both net asset value (NAV) per share and book value per share (approximately 33% to 45% discount to the $23.56 estimated NAV per share, and up to a 20% discount to book value per share of $16.35). Since listing, we have received many inquiries from our broker dealer and RIA clients on why the shares are trading at such a discount from the $25 per share IPO price. I think there are a couple of key points regarding the trading range’s relation to the initial public offering price (when the program was offered as a non-traded REIT) that are important to understand: […]