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 A report showing a well-rounded picture of an investment has much less value if the information is out-of-date.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
GAAP Performance: What You Need To Know
by firstname.lastname@example.org (Kemp H. Hanley) on November 14, 2019 at 8:35 pm
Why is there a difference between GAAP and Actual Performance?
Succession Planning: Things to Consider When Passing the Torch
by Kate@FactRight.com (Kate Stephany) on October 17, 2019 at 5:52 pm
I bet you thought this was going to be an article on sponsor succession. Wrong.
Highlights from FactRight's 6th Annual Due Diligence Conference
by Jessica Ryan on September 19, 2019 at 6:42 pm
We are grateful to everyone who helped make this year’s FactRight Due Diligence Conference held last week our biggest and best yet!
Meet the FactRight Team - Jaydee Lindgren
by FactRight, LLC on August 20, 2019 at 6:44 pm
For today’s Meet the Team post, we’ll profile Jaydee Lindgren, one of the newest additions to the FactRight team.
How Distribution Waterfall Structures Affect Investor Returns in Private Placements: Part 2
by Gail Schneck on August 8, 2019 at 5:02 pm
In our last post, we looked at how the nuances of seemingly straightforward distribution waterfalls in private investment programs can materially impact investor returns.