By Adam Long
Private funds are becoming an ever more significant component of the American financial ecosystem. Whether we are talking about real estate funds buying up large swaths of homes for rent, private companies reaching valuations in the billions before issuing an IPO, or the exponential growth of private credit, more and more wealth creation opportunities are shifting into private markets.
Look at one of the greatest investment allocators, the Yale Endowment, and you will find that the overwhelming majority of their portfolio is allocated to private fund alternative investments, with only 2.3% of the portfolio in domestic equities. Individual investors would love exposure to these private funds, but it is often not in their best interest as the evaluation of these private funds to sift the winners from losers is not for the faint of heart. Much attention is focused on SEC regulations that limit access to private funds, but before our attention can shift to opening up access, the industry needs to achieve the transparency and level of disclosure that would allow private investors to effectively assess opportunities and make informed investment decisions.
Key Components of Evaluating Private Funds
Due Diligence Questionnaires: DDQs that institutional investors require of these private funds have become much more standardized with hundreds of questions that have been developed over decades of experiencing potential failure points. These effectively cover policies, procedures, and paint a detailed picture of the manager from behind the curtain of the marketing materials.
Agreements and Terms: As complete creatures of contract, private funds can each have unique governing and financial terms that require a detailed review of the governing limited partnership agreement and other contractual agreements.
Track Record and Team: While the adage is that past performance is not indicative of future returns, looking at past performance is the best we have. Making sure that you are reviewing a complete track record with a clear understanding of who contributed to achieving that track record is essential. Making sure to compare apples to apples when assessing results is essential.
Using Technological Advancements to Modernize and Standardize Reporting
Advancements in AI/ML (artificial intelligence and machine learning) and OCR (optical character recognition) make it possible to digitize and summarize the massive amounts of data available to evaluate private funds in a digestible and understandable format. Examples of the sort of advancements that would be possible:
- Standardized track records and quarterly results of all active offerings in a searchable database that can dynamically compare these results to varied benchmarks.
- Digitization of the key terms of the offering that will allow for comparison to market ranges for different offering types.
- Providing a precedent form for certain sections of the limited partnership agreement and then showing a redline to highlight any changes from the standard form.
- Having a registration of key persons with their associated track records and what offerings they are currently affiliated with.
Private funds have long avoided an open and transparent marketplace, allowing the charlatans to hide amongst the behemoths. Technological advancements and the ever-growing scale of private funds make the moment ripe for either a revision of government regulation to mandate standardized reporting or the development of a private market solution.
It is hard to predict what will happen, but the market is changing and it is time for private funds to change with it.
Adam Long
Director of Investor Relations
Adam was an Arjay Miller Scholar, receiving his MBA from the Stanford GSB and is currently completing his JD at Harvard Law. His professional experience has included stops at institutional leaders including Fortress Investment Group, Kirkland and Ellis, and Colliers International. As the Managing Director and Chief Operating Officer for Colliers in the Intermountain West, Adam oversaw 200+ real estate professionals and over $4bn in annual transactions. Previously, Adam was the Executive Chief of Staff for Coldwell Banker Commercial Advisors, guiding the firm through an expansion from 4 to 30 offices across North America before merging with Colliers. Adam was a founding partner of Millcreek Commercial Properties, a leading merchant developer and fractionalized real estate investment platform, facilitating more than 100 real estate transactions annually.
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