Why Investors Are Better Off Investing in Funds vs. Direct Investments

 CEO at DarcMatterCrowdfundBeat  Sr. contributing guest editor,

In the world of alternative investments, there has been a recent surge in popularity for direct deals or direct investments into specific companies. Frictions around manager fees and alleged lackluster performance have left investors considering the overall benefits of investing directly into private companies to augment their portfolio of alternative investments. However, direct investing poses unique challenges and risks for investors which can be easily overlooked.

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Deal Sourcing

In order to properly assess the viability and investment worthiness of any investment, it’s important to have some type of benchmark and sustainable flow that creates a universe of investable opportunities from which to choose.  Most investors are not professional managers and advisors that spend the majority of their time performing research around an industry and connecting with deal pipelines.  As such, investors that are looking for deal flow will likely be left to their own personal networks and introductions, which is not the most effective methodology to create robust deal pipelines.

 

Diversification

As is the case with angel investing, direct growth stage private equity investments require a certain amount of diversification in order to be effective. Unlike professional private equity money managers that may take operational control of companies, most investors will likely be left in a passive position in which the primary control is only over their own portfolios. On the opposite spectrum, investors that participate in managed funds are able to enjoy de facto diversification across multiple companies and assets.

 

Professional Money Management

For better or for worse, the best managers that have their investors’ interests as their core motivation do very well and command a loyal investor following. Professional money management is likely here to stay. Depending on the investor’s expertise and risk profile, it may be better to allocate time and research into analyzing money managers as opposed to searching for standalone opportunities that will require significant resources and ongoing maintenance.

 

The typical 2 / 20 model is continuously debated and revisited. However, it is not difficult to see that the top performers in the industry are consistently sought out by investors and respected for their investing acumen and know how. As new developments in technology create greater transparency and informational efficiencies within the private markets, what we believe will change is the amount of information investors will demand from money managers. This in turn will have the effect of sinking less- than-excellent performers.  What we do believe for certain is that top investing professionals are here to stay and will be sought out by investors of all types.

 

DarcMatter is a technology platform providing enhanced capital connectivity between issuers and investors in the alternative investment space. VisitDarcMatter.com to start raising capital or get transparent access to alternative investment opportunities.

*Original post shared on DarcMatter’s blog

Written by
Sang H. Lee

Sang H. Lee

DarcMatter is a technology platform providing enhanced capital connectivity between issuers and investors in the alternative investment space. VisitDarcMatter.com to start raising capital or get transparent access to alternative investment opportunities.

 

 

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