One of the key trends in 2015 in the financial services industry is the use and growth of online deal sourcing and investing. As fintech starts to disintermediate and digitize many of these processes, it’s important to address some of the common investor misconceptions about online investing when it comes to alternative investments.
1. There’s an inability to access quality deals
The most prominent private equity, VC, and hedge funds are often oversubscribed with significant institutional capital. There’s the common misconception that smaller institutions and qualified investors remain fighting over the leftovers. But the leftovers, which can be new firms or firms without extensive track-records can actually perform as well or better than established funds. Emerging managers have generally posted superior returns during their first three years compared to the first three years of funds launched by veteran managers. According to a Preqin study, since 2007 the average emerging manager long/short fund returned 8.8% net of fees in its first three years of trading while established managers returned only 5.38%. Additionally, as institutional capital flows to the most well-known fund managers, the risk/return profile of these strategies change. Institutional investors like pension funds and endowments have extremely long investment horizons, and have mandates to be more conservative and preserve capital. This will likely decrease returns but also limit volatility. While this may be what many investors look for, there are still great deals available outside of the prominent funds, with significant potential to earn enhanced returns.
2. There’s a lack of transparent information
As with any private investment deal, a due diligence process is extremely important in assessing the investment worthiness of an opportunity. This requires a full spectrum of analysis from an understanding of the investment at a macroeconomic level, as well as the ability to diligence manage- specific strengths and weaknesses from track record, level of expertise, team and operational support. This requires a deep dive into the opportunity which entails personal communication with the fund manager or company. In this respect, investing in alternative investments online will never be like investing in public equities or bonds online. Public stocks and bonds can be analyzed and metrics can be standardized in many different ways. The point is that the information is all there to digest and form an investment opinion. The high touch nature and significant diligence required to commit to alternatives require a greater timeline of diligence. In this respect, the onus is on the investor to demand transparent and clear information about the opportunity. Investing in alternatives online really means having the ability to source deals in a more efficient and seamless way. A good online platform will require minimum disclosure of information so that an investor can at least form an educated judgement on the opportunity before doing a deep dive. For example, DarcMatter requires issuers to provide information on market analysis, strategy, track record, historical returns, manager backgrounds, information on key advisors, as well as full disclosure of deal terms.
3. There are hidden fees
Investing in alternative investments requires an understanding about the fee structure related to the investments. Typically, pooled funds charge a management fee as a percentage of assets, and a performance fee as a percentage of profits. The utilization of a digital platform to invest in these structures should not alter this typical fee structure for investors, not to mention that this altering has the potential to conflict with certain financial regulations. Alternative investment platforms should simply allow qualified investors the ability to source, diligence, and potentially invest in prospective opportunities.
4. Online investing is opaque and secretive
So you’re looking online for a private equity, venture capital, hedge fund, or an allocation to a private company? It does seem that with the nature of the industry, there could be an opportunity for secret dealings or fraudsters. That’s why it’s important to understand the tools in place to ensure transparency and accuracy of information. If a platform is also a registered broker dealer, the diligence is in place to ensure that the offering has been vetted for quality. Other platforms should have a process that ensures at least that issuers are who they say they are, and that there are proper measures to ensure that investors meet requirement standards to invest. Additionally, the process should be seamless in that from the investor perspective, the issuer’s identity and contact information is transparent and easily accessible. These types of investments require a direct line of communication between investor and issuer. If that type of communication isn’t easily available, investors should stay away. The good news is that with many platforms like DarcMatter, there are many ways for an investor to express interest in various opportunities and communicate in a transparent way to make meaningful connections.
5. There’s inaccurate information on the Internet
As was alluded to before, there are tools in place for platforms to ensure accuracy of information. At the end of the day, if an opportunity appears attractive to an investor, it’s the investor’s duty to ensure all information is expressed accurately. Whether this means background check procedures, reviewing audited financials, or a visit to the firm or place of business, these diligence tasks are inevitable. Most platforms perform due diligence on the opportunity to ensure correct disclosure prior to displaying it to the qualified investor. What’s important in this case is that the platform isn’t luring in clients with false information.
DarcMatter is a technology platform providing enhanced capital connectivity between issuers and investors in the alternative investment space. Visit DarcMatter.com to start raising capital or get transparent access to alternative investment opportunities.Visit DarcMatter