Overcoming the Challenges of Investing in Private Funds

Private funds can be a very effective vehicle for diversifying an investment portfolio. Alternative assets such as private equity, venture capital, real estate, hedge funds and fund of funds can provide uncorrelated strategies and returns. However, unlike a mutual fund or other liquid vehicles, getting into a private fund hasn’t been easy for the individual investor. Because of their high minimum investment – anywhere from $5-$10M and up for institutional funds – participation in private funds has traditionally been limited to institutional investors.

Portfolio allocations to alternative investments among individual investors average less than 10% compared with 30% among institutional investors and far higher among the largest university endowments and pension plans.

The Minimum Investment Obstacle

Enterprising wealth managers for high net worth individuals and family offices have tried to meet the minimum investment hurdle by aggregating clients in a feeder fund. Let’s say a private fund launches with a $5M minimum investment – the wealth manager puts together 50 clients, each investing $100K. By aggregating clients’ assets, wealth managers help them gain access to institutional-quality alternative investments from some of the most respected firms in the industry.

The Administration and Management Roadblock

While a feeder fund satisfies the investment minimum, minimums aren’t the only hurdle that wealth managers and their clients face in investing in private funds. For a wealth manager, the paperwork can be enormously time-consuming. Whereas an institutional portfolio manager must complete only one set of documents for a large client to participate in a private fund, a wealth manager has to complete a set of documents for each feeder fund participant. A wealth manager may need to fill out documents for 100 or more clients for a single feeder fund.

And that’s just to get into the fund. Once clients are invested, the wealth manager needs to handle all the back-office management of quarterly and year-end reporting, capital calls, distributions, audit and tax reporting. And if a wealth manager wants to offer its client base more than one feeder fund? You can see how the cost-benefit incentive for the wealth manager begins to dwindle as the paperwork mounts.

The Due Diligence Hurdle

A wealth manager can create a feeder fund with a group of clients, be willing to take on the administrative paperwork, but must still thoroughly vet the targeted private fund. A manager needs to carefully evaluate a fund on criteria such as performance, risk, and reputation as well as fund manager turnover, trustworthiness, accessibility, and communication style. In fact, of all the potential barriers to investing, due diligence can be the most difficult and time-consuming hurdle.

Where Others See Challenges, We See Opportunities

Is the answer to just sit out of the private fund market? We say, “Absolutely not.” Taking years of experience in the alternative investment industry, PPB Capital Partners is a new form of alternative asset fiduciary. We are the bridge between institutional fund managers and wealth managers. With our combination of deep experience, extensive relationships, and proprietary electronic processes, we open the doors for wealth managers to invest client assets in private funds.

We handle feeder fund creation and administration and offer key features such as:

  • Consolidated Dashboard
  • Data & Document Sharing
  • Electronic Subscription Process
  • Capital Calls and Distributions
  • Integrated reporting

With our specialist partner, Castle Hall Alternatives, we provide access to independent experts at handling operational and investment risk due diligence.

The best alternative investments for wealth managers and their clients don’t have to be road blocked or only available to large institutions. Contact us and let us show you how we can be the bridge to accessing private funds for you and your high net worth clients. We also invite you to download our guide: “Starting Your Fund Checklist” to see how we can help you get started.