I nvestor relations for private equity and venture capital funds that raise capital from retail investors is a complex endeavor. Investors have demands and expectations that must be satisfied to retain them as investors and to encourage reinvestment. But in a larger sense, investor relations begins with the needs of potential investors, many of whom are underinformed or misinformed about alternative investments. The everyday investor faces significant obstacles to entry, both real and perceived. To democratize alternative investments, overcoming the obstacles to investing is an investor relations challenge. It is the job of fund sponsors, financial advisors, investing platforms, industry publications and many other industry players in the industry.

There are six significant obstacles to investing in alternatives.

1. Investor Awareness

One of the fundamental challenges of investor relations is increasing investor awareness. Many potential investors are simply unaware of alternative investments. While private equity and venture capital funds are known terms, they are less recognized as alternative investments. The perception that these investments are reserved for the wealthy and are complex hinders their broader acceptance. Therefore, investor relations must focus on familiarizing investors with the nature of these investments, their mechanisms, and what to expect. Educating investors is a critical aspect of successful investor relations.

2. Advisor Awareness

Investor relations extend beyond just potential investors; financial advisors play a crucial role. Often, advisors are as unfamiliar with private equity and venture capital as the investors they serve. They are more accustomed to stocks, bonds, and mutual funds. The due diligence process for alternative investments differs significantly, as do transaction processes and tax documentation. Effective investor relations must educate financial advisors about these differences, helping them understand the benefits of alternative investments for portfolio diversification. Pulling advisors out of their professional ruts is a necessary step in expanding the acceptance of alternative investments.

3. Access

Access to private equity and venture capital investments has traditionally been limited to accredited investors and those with pre-existing relationships with broker-dealers or RIAs. However, this is changing. Crowdfunding, Regulation A, certain allowances within Regulation D and funds-of-funds are opening up these opportunities to a broader audience. Still, making potential investors aware of these options remains a significant challenge for investor relations. Ensuring that all interested parties, regardless of income or net worth, understand their access options is vital.

4. Perceived Risk

The perceived risk associated with alternative investments is another major hurdle for potential investors. Because private funds often operate under SEC exemptions and are viewed as the domain of the wealthy, many potential investors presume high risk. The image of highly leveraged hedge funds, long capital lock-ups and high-profile fraud cases like Bernie Madoff create apprehension. Effective investor relations must work to demystify these investments, clearly explaining the risks and benefits. Transparent communication can help alleviate concerns and build trust.

5. Investment Minimums

Investment minimums can put private funds out of reach for many investors. However, crowdfunding platforms, some Regulation A funds and new funds targeting Generation Z are changing this landscape. Some platforms allow for small investments via websites and mobile apps, making alternative investments accessible to even the smallest investors. Funds-of-funds also play a role in providing exposure to private equity and venture capital for everyday investors. Investor relations outreach must highlight these opportunities, showing how even small investors can participate.

6. Paperwork

Lengthy subscription documents have long been a burden for fund sponsors, financial advisors and investors. The detailed process of completing, submitting and processing these documents can slow the investment process and frustrate all parties. However, the approval of electronic signatures in many jurisdictions is streamlining this process. Digital subscription processes, straight-through processing providers, online platforms and mobile apps are simplifying investing in alternatives. Despite this progress, many alternative investment sponsors still rely on paper documents. Investor relations must emphasize the benefits of modernizing these processes, encouraging the adoption of digital solutions.

Transforming the Industry

Investor relations for private equity and venture capital funds goes beyond serving the needs of existing investors. From increasing investor awareness and educating advisors to improving access and modernizing processes, effective investor relations on an industry-wide basis is crucial to the industry’s future. By overcoming obstacles, both real and perceived, to investing in private equity and venture capital, the alternatives industry attracts a broader base of investors, expands financing options for business and contributes to the overall dynamism of the American economy.