Use a Self-Directed IRA as a Vast, Untapped Source for VC Funding

IRA accounts held assets valued at over $7.6 Trillion at the close of 2015. 95+% of those assets were tucked-away in Wall Street-related financial assets (e.g. – stocks, bonds & mutual funds), leaving less than 5% of IRA’s invested in “alternative assets” such as real estate, private loans, precious metals or privately-held companies. “Why so?” one might ask. The primary reason appears simply to be “lack of awareness.”

Tell your broker or investment adviser you’d like to invest IRA monies in a private real estate or venture capital opportunity of your choosing, then listen closely to the response. In all likelihood, you’ll get the standard “it’s way too risky, complicated and burdensome, so steer clear!” (Translation: “I don’t get paid when you invest in those assets, so let’s stick with the financial products I’m selling.”)

Fact is: IRA Account Holders are as free to invest in privately-held assets or start-up business ventures as they are to acquire stock in well-established publicly traded companies. But, there is a key ingredient necessary to make this move. The first step is to take control of your IRA investing by engaging an IRA Custodian/Administrator focused on alternative assets and establish a fully Self-Directed IRA Account. (RealTrust IRA Alternatives, LLC (RealTrust) specializes in self-directed retirement plans for alternative asset investing.) In so doing, you will effectively become chief executive of your financial decision-making, exponentially expand your investment choices and afford your retirement portfolio what we call “real diversification.” (Isn’t spreading your investments exclusively amongst Wall Street products much like arranging deck chairs on the Titanic? When the financial system ship hits the proverbial iceberg, chances are most everything aboard ends up on the bottom.)

The process of self-directing IRA monies into alternative assets is very straightforward. In conjunction with setting up your new account, RealTrust will help execute a basic Trustee-to-Trustee transfer or rollover of whatever dollar amount you elect to invest in the given opportunity (say, for example, a venture capital fund). You direct the specified monies to be invested with the chosen Fund Sponsor and RealTrust will custody and account for the newly-acquired shares on behalf of your self-directed IRA (just like Fidelity administers ones mutual funds). As the start-up venture realizes its upside, the returns come back to the IRA Account on a tax-deferred basis (or tax-free if a Roth account). You’re well on your way to becoming a “Successful Self-Director…!”

Mark Hodges, JD

Managing Director, Real Trust Group

Private Equity: A Chance for Retirees to Profit From a Career’s Worth of Knowledge

Private equity allows you to invest in what you know. angelMD permits lifelong physicians to invest in the healthcare industry.

If you have familiarity within a specific industry, you may wish to look at private equity opportunities in the businesses you know.

Outside of mainstream retirement choices, private equity funds invest directly in companies that are privately held.

What’s so “private” about private equity?

At a high level, private equity (also referred to as a private placement) is a broad category that encompasses a variety of assets, ranging from private hedge funds and private non-traded REITs, to debt instruments of private companies. A common characteristic is that they are not publicly traded on a stock exchange.

Since knowing what you own is generally considered a sound investing principal, talented pre-retirees and retirees who know something about the ups and downs of specific industries, such as information technology, consumer goods and healthcare, may have the knowledge needed to consider investing in Private Equity in their IRA.

If you are an expert with retirement on your mind, you may have real-world experience with product trends that affect businesses and the economy every day, influences that could contribute to targeted growth opportunities.

Private equity’s growing popularity

To gauge the popularity of private equity, consider today’s overworked pension manager.

As Ayesha Javed reported recently in Dow Jones’ eFinancialNews, “In the past couple of years, private equity firms have been giving capital back to investors at a record pace.” The reason? The past year has proven so favorable for private equity that the category is outgrowing its portfolio allocation targets, forcing many pension managers to reduce their private equity exposure.

According to Ernst & Young’s 2015 Global Private Equity Survey (pdf), “private equity is the asset class of choice. Investors have clearly indicated that they are most likely to allocate capital to private equity compared with other alternative asset classes. This represents a clear change from the past several years.”

The Ernst & Young Survey also pointed out that “the majority of investors are allocating more than 10 percent of their capital to private equity, and almost two of every five investors (39 percent) are allocating more than 25 percent to private equity. This is a testament to the performance and resilience of private equity both during and after the (2008-2009) financial crisis.”

Private equity and professional advice

As Senior Vice President, Equity Institutional in Westlake, Ohio, Jeffrey Kelley speaks regularly to broker-dealers and financial advisors who are incorporating private equity investments in their clients’ portfolios.

“They are reminding their clients to undertake a prudent and rigorous review of each private-equity investment opportunity making a commitment,” Kelley said.

Equity Institutional services the institutional clients of Equity Trust Company, a passive custodian, which does not provide tax, legal or investment advice.

“However, as a passive custodian we are expected to facilitate the investment of private equity into IRAs in accordance with the IRS rules,” Kelley continued. “One way the firm hopes to accomplish that is by helping educate the investing public. For example, retirees, pre-retirees – even financial advisors – who want to know more about private equity’s potential are invited to download a free white paper, Not Just for Millionaires Anymore: Six Ways Private Equity Can Play a Role in Retirement Planning.

Kelley added that “Many advisors I know also say that self-directed IRAs invested in private equity can provide a way for their clients to achieve a greater measure of diversification in a portfolio.” From that perspective, John C. Bogle, founder of the Vanguard Group, probably put it best: “Diversification is not only the first important thing investors should think about, but the second and the third, and probably the fourth and fifth, too.”

Private equity’s total return track record

For the performance-minded, the Private Equity Growth Capital Council offers regular updates that compare private equity with other investments. And, while no investment is guaranteed, over the time frames below, private equity has outperformed the Russell 3000 Index (see chart below) as well as the S&P 500 Total Return Index [See Private Equity Performance Update. Page 6]

Private Equity

Will equity crowdfunding popularize private equity?

David M. Rubenstein, of the Carlyle Group, has predicted that a “great revolution” in private equity may be on the horizon for all retail investors, as the Securities and Exchange Commission (SEC) issued new crowdfunding rules on May 16, 2016. As a result, non-accredited investors may invest in early-stage companies – up to certain limits, but to a greater extent than they could in prior years.

While accredited investors – those who meet qualifications, such as having a net worth of at least $1 million – were already qualified to participate in equity crowdfunding, some experts believe crowdfunding opportunities will become more widespread now that retail investors who are not accredited can participate.

The net result may be that all investors will be able to participate in private equity-like offerings for considerably smaller investments.

As they ponder the desirability of allocating rollover assets to a private equity vehicle, IRA investors may also want to take a few minutes to consider how the new Department of Labor Fiduciary Rule might impact their relationship with their adviser.

Designed for full implementation by Jan. 1, 2018, the rule sets out to protect retirement assets from potential conflicts of interest by naming financial advisers as “fiduciary” in all non-ERISA retirement investment transactions. The rule requires advisers to receive a signed Best Interest Contract Exemption (BICE) from their clients prior to completing a rollover – especially if the fees go up.

There are other important fiduciary considerations, too, Kelley said. (See Alternative Future: The Way Forward in the Post-DOL Fiduciary World– pdf )  “Questions for an advisor might include: ’Does being a fiduciary affect the products you offer?’ and ‘How does the fiduciary standard affect your relationship with clients like me?’”

Investors should understand the potential risks that come with investing in this asset class. Private equity funds keep much of their investment information confidential, so performing due diligence and comparing the performance of various fund managers may prove challenging. In addition, private equity investments are illiquid and investors must often wait several years to realize returns. Private equity funds may not be right for every self-directed IRA. But for those retirees and others with a long investment horizon who are comfortable with longer holding periods, it may offer portfolio diversification benefits and the ability to potentially outperform more traditional asset classes.

From: Private Equity: A Chance for Retirees to Profit From a Career’s Worth of Knowledge

By John Drachman

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Reducing Risk: Investing via Funds

In spite of a reputation for long exit times and higher risk, investments in early stage healthcare companies are on the rise. An increasing portion of those investments is being executed through funds. In the past two years, health care has taken up about a third of the capital invested through funds in the USA. Funds strive to reduce investor risk through diversification. They have become such a trend in healthcare investing that even corporate venture investors (CVC) are getting in the game. In 2015, 62 CVCs participated in 262 healthcare deals (source: Health Evolution Summit). While the benefit of portfolio diversification is a logical reason to invest through a fund, there are some key factors to consider:

  • Fund manager
  • Fund thesis
  • Fund structure

Fund managers have sole discretion as to which targets he or she intends to invest. As funds become popular, many see the trend as an opportunity to raise funds to augment their own investment activity; which is why Limited Partners (LPs) need to be confident their fund manager’s investment experience lends itself to success. Do they understand how to build and manage a portfolio? Do they have access to superior deal flow? Do they know how to identify and work with quality management teams? Do they offer a competitive advantage through a unique or superior strategy?

Somewhat separate from a fund manager’s ability to manage a fund, is her/her thesis. A macro thesis articulates the trends they have identified as ideal for making an investment. Like in any business, they need to have a game plan that is unique so as to have an advantage. It is not enough to simply identify macro trends. Factors such as timing, terms, and team are material. It is important that LPs have confidence in the fund manager and his/her investment thesis.

It’s also important to know how a fund manager is compensated. Managers who extract high fees may be less incentivized for their funds to yield high returns than those receiving carried interest from successful exits. While there is usually little deviation in early stage PE fund terms, LPs should read the fine print.  A 1.5% management fee, for example, might sound attractive versus 2.5% until you realize the fund will have limited ability to conduct due diligence and even less ability to manage investments for a duration of 5 to 7 years…the minimum needed in virtually any fund. It is a red flag if a fund does not have enough fees to properly operate. The last thing any investor should want is to be penny wise and pound

There is no right or wrong way to invest in healthcare, but savvy investors are increasingly participating in funds in an attempt to diversify their portfolio. One thing is certain, the macro trends favor healthcare investing for years to come.

Analog to Digital World – Information (part 2 of 2)

“The essence of investment management is the management of risks not the management of returns.”

Benjamin Graham (mentor to Warren Buffet)

“Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.”

Warren Buffet


digital worldThe management of risk begins with information. We cannot manage what we do not know…so the unknown poses the greatest risk. Said another way, the foundation of investing is information. (as Buffet remarks, information related to other people’s investing behavior is a poor signal.)

Let me use a simplified real estate example to illustrate. If you purchase a property for investment purposes, you do so because you believe the property will increase in value. You believe it will increase in value for some specific or collection of reasons. In an efficient marketplace, when there is a discrepancy between the price of something and the value of that something, then the market will correct this inefficiency sooner or later. In this example, you are taking advantage of a potential gap between the actual value and the current price. You believe you have an information edge.

Startup investing presents the greatest opportunity for investment returns. Why? There are lots of unknowns intrinsic to the present valuation of the company.

When Howard Schultz was raising money to acquire Starbucks, most potential investors rejected the idea. Hundreds actually. They did not understand his vision for the market potential of gourmet coffee. The information they factored into their decision making did not allow them to perceive the opportunity. Those few that did perceive the opportunity, including a physician who invested $250K, experienced life changing returns. In the rear view mirror we are all geniuses.

Part 1 of this article laid out the fact that investing is moving from an analog world to an increasingly digital world. One of the primary drivers behind this is the ability of computers to organize, analyze and present information in ways that did not exist even 10 years ago. Given that investing is largely about information discovery and analysis, we begin to see why entirely analog investing is not long for this world.

The angelMD business model was designed with the idea that early stage investing can be far more effective. We can invest with better information. While angelMD spends a great deal of time focused on supporting companies post investment, we believe technology can help us better collect information, identify patterns and present the information in ways that helps investors make more informed decisions.

The larger the network gets, the better the information we have available. The larger the network gets, the more effective we can be in supporting startups post investment. This will accelerate medical innovation. It will transform a multi billion-dollar industry… shifting it from an analog world to an increasingly digital world. It will result in better financial returns.

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Analog to Digital World

digital worldIn 1994 people purchased books at B. Dalton, Barnes and Noble and Borders. It was this year that was born and began shifting a bricks and mortar industry (read: analog) to the digital world. Today those same major book chains are either gone or a fragment of their original selves.

In 1996 the travel industry moved from a largely analog industry to a predominantly digital industry with the launch of Expedia.  For those too young to remember, people used to arrange flights and vacations through travel agents and today they mostly do so with the click of a few buttons.

In 2006 small businesses used to visit their local bank and fill out reams of paperwork only to wait weeks to find out if they were approved for a loan. That same year Lending Club made this process digital and now businesses can get a loan online in under 48 hours. Oh, and it was this same year when we stopped asking real estate agents how much our house was worth and instead went to Zillow, another Seattle based company, to give us this information.

In 2009 Uber disrupted the taxi industry in which customers stood on a side-walk to hail a cab. Now we push a button and a car arrives…and this doesn’t require a manual payment transaction at the conclusion of the ride.

Each of these examples, and many more, are illustrative of the transformative shift from an analog to a digital world.

Early stage investing is squarely in the cross hairs for this transformation.

Early stage investing largely revolves around processes such as these:

  • Entrepreneurs traveling from city to city and meeting to meeting to engage prospective angel or venture capital investors.
  • Regional angel groups hosting monthly dinner meetings at which entrepreneurs who made it through their screening committee attend and pitch their story. Sometimes they even pay for the privilege.
  • Investors and angel groups call friends or sit on conference calls to share their investment deals in case others want to participate. (quasi-syndication)
  • Investors read through a PowerPoint slide deck to absorb the details about the company raising money.

While there is nothing inherently wrong with any of these, they are limited and inefficient…the equivalent of haling a taxi while plotting your directions on an Etch-a-Sketch.

The digital era of early stage investing is underway as the result of a few key factors including these:

  • The JOBs Act – this landmark legal framework represents the biggest shift in securities laws since the passing of the 1933 Securities Act.
    • The definition of Accredited Investor has begun to widen, resulting in a democratization of investment opportunities for a bigger portion of the populace.
    • The legal pathway for crowdfunding web sites to operate was set in motion.
  • Lending Club and Kickstarter demonstrated the power of the crowd to aggregate and deploy capital online.
  • The economic collapse of 2007/2008 pushed consumers to be increasingly involved in their own financial planning and investments. Brokerage houses touting their product du jour are decreasingly being given carte blanche by clients. Moreover, online educational and informational tools have given non-finance folks the ability to participate in investment arenas previously limited to an elite group.
  • The venture capital industry continues to provide negative returns on investment leading more LPs to pull capital in search of better alternatives.

angelMD was created with all of this in mind. There is enormous opportunity in early stage investing, life science investing in particular.

We know the investment process in the coming years will look nothing like it does today. The ability to effectively analyze and manage early stage investments through online tools will increasingly look like mutual fund and public stock investing with some variants.

In a subsequent post I’ll continue this line of thinking leading and the essence of what angelMD aims to accomplish.

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