Registered Privates are a cross between traditional private placements, like hedge funds, and more liquid alternatives. To be registered, funds are subject to more stringent regulation and are required to have certain investor protections in place, such as an independant board and an independant custodian. Other advantages such funds have for investors include potentially lower minimum investments, lower fees and shorter lock-ups. It is important to note that even though these funds are registered, they are still only available to accredited investors.
Q. “Registered privates” are a cross between the new liquid alternatives, like mutual funds, and traditional private placements, right?
A. Yes. Liquid alternatives are registered funds, privately placed funds mostly are not… even though the manager may be a Registered Investment Advisor most privately placed funds are not registered. Liquid alternative funds, of course, are registered.
Q. And that’s what allows them to be bought and sold by the public, right? That’s why they’re liquid.
A. Correct. But to be registered, a fund has to have certain investor protections: an independent board and independent custodian are two big ones. Privately placed funds don’t have to have those. But registered privates do: so they give much better investor protections than unregistered private placements.
Q. OK, aside from those important protections, what are the other advantages to investors?
A. First, because they can have an unlimited number of investors, they allow hedge, PE and venture firms to accept much lower investment minimums than they will in traditional private placements. Second, most carry lower fees, require shorter lockups, and offer better liquidity than traditional private placements. And third, you can invest in them through IRAs, which many private placements don’t allow.
Q. OK, but why not just buy liquid alternatives? They have those benefits, too.
A. Because registered privates aren’t constrained by the mutual fund investment limitations. Thus, they can invest in less liquid assets, and the management can pursue the kinds of distressed and activist styles that liquid alternatives can’t. Indeed, registered privates can run any hedge, venture, PE or real assets strategy.
Q. But still, these are private placements, for accredited investors only.
A. Right. And for managers, they do involve additional fees, legal hassles, and reporting requirements. as compared to traditional private placements. But those are headaches for the managers, not the investors.