Many new private fund sponsors are eager to distribute their offerings to the retail investor market through broker-dealers (BDs) and registered investment advisors (RIAs). As enthusiastic as a fund sponsor may be about the prospects of a new offering, it is important for them to consider what BDs and RIAs are looking for. Financial advisors are concerned with investment opportunities being differentiated from other offerings they recommend and being well constructed from a compliance, risk and operational point of view.
When a BD or RIA considers entering into a selling agreement with a private equity (PE) or venture capital (VC) fund sponsor, they evaluate several key characteristics to ensure the potential partnership aligns with their business model, risk tolerance and client needs. Advisors are concerned with the qualities of both the fund manager and the fund.
The Fund Manager – What Advisors Look For
Track Record and Performance: A strong historical performance record of the PE or VC fund sponsor is crucial. Broker-dealers and RIAs look for consistent returns that demonstrate the fund sponsor’s ability to navigate market cycles and make strategic investment decisions.
Fund Management Team: The experience and expertise of the fund management team are pivotal. A team with a proven track record, deep industry connections, and a clear investment strategy provides confidence that they can identify and capitalize on investment opportunities.
Transparency and Reporting: Transparency in operations, investment strategies, and regular, detailed reporting are essential. Advisors need to provide their clients with clear, comprehensive information about where and how their money is invested, including risks and performance metrics.
Regulatory Compliance and Reputation: The fund sponsor must have a clean regulatory record and adhere to the highest ethical standards. Compliance with relevant securities regulations and a reputation for integrity are non-negotiable. They directly impact the trust and confidence of investors.
Alignment of Interests: Advisors prefer fund sponsors who demonstrate an alignment of interests with investors, often evidenced by the fund managers investing their own capital in the fund. This alignment ensures that the fund managers have a vested interest in the fund’s success.
The Fund – What Advisors Look For
Market and Sector Focus: How the fund is differentiated from other offerings is an important consideration. Broker-dealers and RIAs look for funds that either complement their existing investment offerings or provide new, strategic investment opportunities for their clients.
Investment Strategy and Philosophy: The fund’s investment strategy and philosophy should align with the advisor’s client profiles and investment goals. Whether it’s a focus on early-stage tech startups or mature, income-generating companies, the strategy should match the risk appetite and investment horizon of their clients.
Risk Management: Effective risk management strategies protect investments against market volatility and unforeseen events. In the interest of their clients, broker-dealers and RIAs evaluate the fund sponsor’s approach to risk assessment and mitigation.
Liquidity Terms: Given the typically illiquid nature of PE and VC investments, the liquidity terms, including lock-up periods and redemption policies, are carefully scrutinized. Broker-dealers and RIAs look for terms that align with their clients’ liquidity needs and investment timelines.
Fee Structure: The fee structure of the fund should be transparent, reasonable and aligned with industry standards. High fees erode investment returns, so advisors seek structures that balance fair compensation for the fund managers with the interests of investors.
By carefully evaluating these characteristics, broker-dealers and RIAs can select PE and VC fund sponsors that offer the most promising investment opportunities for their clients while ensuring that these investments align with their overall investment strategy, risk tolerance and regulatory obligations. New fund sponsors should have all these considerations in mind before structuring a fund intended for the retail investor market.
