Questions about FactRight?
This FAQs page is designed to answer some general questions about third party due diligence. If you’re looking for more information, consider visiting our pages on FR Risk Management and FactRight’s due diligence reporting services.
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 A report showing a well-rounded picture of an investment has much less value if the information is out-of-date.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.
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Recent Blogs from FactRight
- What a High Home Prices-to-Income Ratio Could Mean for Residential Real Estate Programsby steve.s@factright.com (Steve Sims) on January 26, 2023 at 7:18 pm
Over the past several years, FactRighthas seen a trend in increased demand for residential real estate investment programs (e.g., multifamily, build-to-rent, single family residences).While our offering-level reports provide a market overview at the MSA-level, I wanted to goa few levels higher to the national scale. This blog primarily looks at the relationship of single-family home prices and income in the United States to answer the following question:What are the implications for residentialreal estate programs if housing is overpriced relative to historic norms?
- Lapses in Due Diligence and the Collapse of FTX: How Could so Many Have Missed so Much?by Jeff.B@factright.com (Jeff Baumgartner) on December 13, 2022 at 9:16 pm
By now, you may be generally familiar with the recent collapse of FTX, and some of the reasons for its failures are obvious. But by examining FTX side-by-side with perhaps the most infamous investment fraud ever perpetrated, we can discover some keys as to why lapses in due diligence may never be a thing of the past. These two epic failures bear little factual resemblance to one another at first glance, but this post will look more closely at the more transcendent lessons they hold.
- All Preferred Shares Not Created Equal – Why FactRight Incorporates Scenario Analysis in our Analysis of Preferred Securitiesby kevin@factright.com (Kevin Kirkeby) on November 30, 2022 at 9:21 pm
It should come as no surprise that the old investment adage about getting what you pay for holds true for preferred stock, too. Despite often being pitched as a bond alternative, especially lately, there are multiple factors beyond dividend yield to consider. Among the features, an investor needs to understand are the liquidity provisions, dividend policy, and preferred shareholder rights. Sponsors tend to get irritable when FactRight stress tests their pro forma model or highlights weak investor protections, dismissing the concerns as implicating scenarios highly unlikely to ever occur. However, sometimes the unlikely or improbable does occur. This post will focus on a real scenario involving several preferred securities that underscores the need for due diligence in these areas.
- How to Assess Affiliated Transactions in Private Placement Programsby kemp@factright.com (Kemp H. Hanley) on October 19, 2022 at 5:37 pm
Affiliated transactions can be thorny. They raise conflicts of interest and create additional governance challenges and risks. The relative fiduciary duties (or lack thereof) that the manager owes to each side of the transaction complicates the picture. Investors are understandably apprehensive about the conflicts in such deals because there is a higher likelihood that value is being shifted to the affiliated party inappropriately.
- The 1031 Show Features FactRight's Brandon Raatikkaby brandon@factright.com (Brandon Raatikka) on September 28, 2022 at 5:00 pm
One of the most prominent products in the alternative investment space in recent years have been DSTs/1031 Exchanges, which has grown to become an annual $8 billion to $10 billion industry. However, with recent trends in rising interest rates and cap rate compression for many asset classes, due diligence on DST programs in the market has never been more important. With that in mind, FactRight’s chief operating officer (and resident DST expert) Brandon Raatikka joined Ridgegate Financial’s Wallace Smith on the 1031 Show to discuss the importance of 1031 due diligence. The podcast, which you can check out below, covers several topics that broker-dealers and RIAs should consider when evaluating the 1031 space, including the following: The benefits of a third-party due diligence report Trends in the 1031 space An overview of DSTs and key benefits of DST investments Key differences between TICs and DSTs, including the Seven Deadly Sins A primer on 721 UPREITs Areas of focus for evaluating a DST sponsor