For many people, the hedge fund world is a mystery. The general belief is that these funds are run by a group of utterly ruthless people who create wealth seemingly out of thin air, and the players make a killing or get killed daily. 

The fact of the matter is hedge funds are run by some of the most dedicated professionals in the financial services industry who understand that people like to have their ice cold lemonade, and lemonade only comes from lemons.  In this article, we are going to decloak some of the mystery surrounding the supposed big, bad hedge fund industry and look at how hedge funds routinely recognize profit opportunities that evolve out of real life business problems that are otherwise seemingly intractable obstacles for businesses and investors to create a win-win outcome opportunity.

__What is a Hedge Fund Anyway?__
Hedge funds are Alternative Investments that are not regulated funds, generally speaking.  These non-regulated funds (and even that is changing) trade in liquid securities and allow investors to redeem their investment positions based upon the net value of the asset pool under management on an ongoing basis.  You get in and you get out when you want but getting in and out means you are trying to time the market by investing in a company that basically understands how to time the market to its own advantage in certain circumstances.  
The hedge fund industry utilizes some of the most sophisticated risk management strategies in trading and investing that can be deployed today.  No risk is too big for the hedge fund industry, provided; the hedge fund professionals can understand the components of the risk issues in play.

__How Big Are These Hedge Funds?__
The hedge fund industry is here to stay.  More than $3 trillion in wealth flows through these funds annually, making the hedge fund industry larger than the GDP of Great Britain – the number 5 ranked economy of the world.  I think it is safe to say that hedge funds are not a fad that is going to fade away anytime soon.  

Many of hedge funds have billions of dollars in assets under management (AUM) and that means there must be real money in play that pays real returns – to both the managers of these funds and the investors who place capital at risk with these funds.

So why do people put their money in these hedge funds?
I Hear About Absolute Return and Am Absolutely Mystified
In many ways, hedge funds mirror the business model of the stock exchanges – whether the market goes up or down, the exchange is making money.  Generally, hedge funds focus on absolute return – the opportunities to employ sophisticated strategies of investment in liquid securities (securities that are readily exchangeable for cash in one form or another) that take advantage of bull markets and bear markets.  The hedge fund management team intrinsically understands the fact every coin has two sides, and they have strategies to make money no matter how the coin flip ends up being on an ongoing basis.

__Who Gets the Squeeze?__
Generally speaking, the hedge fund industry follows what is known as the “2-20” formula for compensation: the fund receives a management fee of 2% of the asset pool value each year and 20% of the upside in the fund they create.  Personally, I think it to be a bargain of extraordinary proportion as the risks are there for all of us in the market and paying someone only 20% of the upside to create Alpha on a scale that outperforms the S&P 500 on a routine basis sure does seem attractive to me.  


What’s The Main Ingredient of Lemonade?

For many people, the hedge fund world is a mystery.  Their understanding of the value proposition of the hedge fund has something to do with lawncare ...

The entry of the world into the Information Age created the opportunity for hedge funds and other investment professionals to create opportunity funds that could meet the challenge of quick turnarounds on emerging investment opportunities.  The venture capital funds sought to get in on the ground floor, make a move quickly, and then ride the wave of opportunity that smart management – combined with a ready pool of capital financing – could create.  This business model has turned out to have been slightly ahead of its time until just a few short years ago.

The advent of broadband technology – readily available to a large swath of locations around the world – has served to give other market participants parity in information access, so venture capital fund professionals had to take their game to the next level.  In this article, we are going to explore some of the factors that make venture capital investing in the Information Age more attractive, and potentially less risky.  After all, in the Information Age, you probably only need three things to control an empire: (i) access to information; and (ii) control of real property; and (iii) control of capital.  Venture capital fund managers know this and seek to create portfolio values by using all three of these new requirements to their fullest extent.

__The Data is the Real Money__
Venture capital funds realized quickly the real money is not only in someone’s product, but also in the data that comes out of the various business transactions supporting the product.  Buyers, sellers, users, locations – all of it has value to someone.  The expert data scientists and managers in analytics understood intrinsically, the value of data is ongoing and very material.  Data can be packaged and sold to many users.  Venture capital funds focus on information technology on multiple levels. Investment strategies that focus on both the product or service of the investment targets, as well as utilizing the data that results from ongoing operations of these investments makes for a potential backstop against investment loss.

__Location is Everything?__
Commercial real estate is about location, location, location.  That is what I learned more than 30 years ago when I started my consulting career in CRE development and capital financing. In today’s world, the location is only important in terms of local market conditions that serve to support the ongoing property revenues.  The revenue capture opportunity of a given CRE property drives all the subsequent calculations as to value, performance, and potential capital gain. Managers understand CRE development, but also combine their knowledge of data analytics in much of their investment decision-making (again, data is the real money).  The data gives them an edge in identifying trending market opportunities the average investor does not understand.  The result is one where the potential exists for arbitrage being applied to the entire spectrum of CRE using analytics as the core predictor of where to go, which types of properties to focus on, and how to structure the resulting business deals to create above-market capital gain opportunities that are attractive to the investing-public that is more sophisticated.

No matter how you end up slicing it, the venture capital investing scene is going to continue to evolve, and you should be ready to evolve with it.  Sometimes, opportunity meets preparedness, and you want to be prepared to succeed.


Venture Capital Investing Takes Another Turn

The entry of the world into the Information Age created the opportunity for hedge funds and other investment professionals to create opportunity funds that could meet the challenge of quick turnarounds on emerging investment opportunities.

At its core, investing is about how much wealth you accumulate over a given period of time, and how well it's preserved.  We search for the magical investment that offers that magic combination of alpha and an investment profile we reasonably believe to be relatively riskless.  In the back of our minds, we all know the tax man cometh. Taxation brings up the subject of the tax-equivalent yield, and in this article, we are going to take a high-level pass at the issue of tax-equivalent yields and the advantage they may provide you. 

Alternative Investments frequently include tax-advantaged features.  The passage of the so-called Trump Tax Credits included many provisions that may serve to create opportunities for investors to realize higher-yielding investment opportunities that may also provide relief from federal income tax liabilities.  Of course, we all know that each investor has their own unique tax issues, and we all know we owe ourselves the duty of reviewing our own tax issues with our tax advisor as a condition precedent to investing.  With that being said, let’s dive on into the shallow end of the tax-equivalent investing pool.

__It’s About The Money__
Investing is about the net funds you get to keep, spend, or pass on to your heirs. The fund managers who specialize in Alternative Investments have a duty to undertake reasonable due diligence regarding every investment their fund makes with investor capital.  The due diligence includes a review of the earnings capacity (called “capacity underwriting”) that has to be completed in two (2) ways: (1) the so-called “cash-on-cash” underwriting analysis; and (2) the tax-equivalent underwriting analysis.

__The Cash-On-Cash Analysis__
As the nomenclature implies, the cash-on-cash (or “COC”) analysis looks at the reasonably expected cash flows to determine the relative allocations between the fund and its investors.  The underwriting review seeks to determine if the given investment would, all other things being equal, provide a return that would be considered to be reasonably consistent with the investment preferences of the capital markets as a whole.  While many factors go into the analysis process itself, the end-results is always the same – for the expected holding period, the expected cash flows that end up in the hands of the investor form the basis for determining the Total Return (Total Cash Flows From All Sources Received Divided By Total Invested Capital), Average Annual Return (Total Return Divided By Number of Years in Holding Period), and the internal rate of return of the investment.  These key point indicators serve as the main goalposts for determining if a given investment opportunity is worthy of serious underwriting and/or sponsorship by the fund’s management team.  You never see the opportunities that lose out in this underwriting review process, only some of the winners.

Yet, the COC analysis only tells part of the story.  We have to go to the tax-equivalent yield analysis to get the whole story. 

__The Tax-Equivalent Analysis__
The tax-equivalent yield analysis takes into consideration the tax consequences owing to the average accredited investor (i.e., you are assumed to be in the top tax bracket), and the available pass-thru tax benefits that may be realized by the average accredited investor, all other things being equal, resulting from the structure of the transaction, the type of asset, cash flows, and exit timing – all of which are unique to every transaction.  The unique profile of every transaction is where the magic may happen, as Alternative Investments include commercial real estate income-producing properties that may be able to utilize important tax benefits to minimize the tax burden associated with the investment cash flows.  The resulting benefits get priced into the yield to tell you what the equivalent cash yield would have to be to get you to the same place in the road, if all of the tax benefits are realized, you fit the average accredited investor profile, etc.  That’s a lot of “ifs, “ands”, or “buts” to be sure.  Having said, the magic comes when you visit your accountant and realize that tax-equivalent yield opportunities on Velvet may have been just what the doctor ordered. 


That Tax-Equivalent Yield Magic

We are all here to do what we are all here to do; make some money.  At its core, investing is about how much wealth you accumulate over a given period of time.

There are only two things certain in this world; death and taxes.  That’s the old saying, but maybe not always true.  One potential outcome that is all but certain is the desire to profit from changing market conditions, and that’s where Alternative Investments have the potential to create real near-term investment opportunities.  

In this blog article, we will explore some of the potential issues, impacts, and resulting conditions that may be key indicators of opportunity shopping in the midst of the chaos which routinely drowns the unwashed masses.

__Market Realities of Tax Code Changes__
Rational Choice Theory holds that all organisms will act in their own self-interest at all times, and under all conditions.  Market economies are built upon the foundation of Rational Choice Theory because its impacts are unavoidable.  The only constant in a market economy is change.  Change is the response to perceived market opportunities for entrepreneurs and businesses to introduce technological advances and/or business innovations into the market in hopes of addressing the perceived market opportunities in a way that is profitable.

Changes in tax laws and rates are always “baked into the deal” in deference to the investing preferences of the capital markets.  Nobody will willingly accept a lower capital gain in exchange for accepting the same set of perceived/actual investment risks a given investment (or class of investments) may require the investor to bear.  

In the end, changes in the tax code are always borne by the end-user/consumer of the business as just another cost of doing business.  Have you ever stopped and wonder why that fundamental tenet of market capitalism functions in this way?  All other things being equal, the investor controls the critical component of capital.  All businesses require the capital investment and there will never likely be a situation where there is more at-risk capital than there are opportunities to deploy that risk capital.

With the previous market realities firmly in your mind, it pays to remember that companies seeking capital investment have to price in the cost of capital on a net basis.  That computation is driven, in no small measure, by the company’s realization of the tax status of the investor, and what taxes the resulting business deal (i.e., the company’s offering “value proposition”) would potentially create for the intended investor.  I spend quite a bit of time in the underwriting due diligence process on the tax-equivalent yield analysis that is designed to address the final impact of the proposed offering value proposition.
Tax Code Implications on Underwriting & Yield Expectations
Tax-equivalent yield calculations attempt to reconcile the impact of tax policy on the investor under certain assumed conditions.  These assumed conditions include the effective tax bracket the average investor is expected to be assessed by the taxing authority (i.e., the IRS).  From an underwriting point of view, the result would be an expected increase in the targeted yield of the offering being the price of business, if in fact tax policy changes result in a higher potential tax burden for the average investor.  This is really good news for investors in general, and for the Alternative Investment vertical in particular (e.g., Velvet alternative investment opportunities).  Increases in taxes are always going to happen, and so are decreases in taxes going to happen.  Therein lies your opportunity with a platform such as Velvet. 

The opportunity lies in realizing the changes are going to continue, and then acting decisively in both directions to effectively execute your own version of tax-equivalent investing arbitrage.  Either way, profits may be realized by understanding some basic principles.  With these principles in hand, the due diligence you undertake will serve to either justify the investment or hurt the investment, so let’s look at how it plays out from a 10,000-foot perspective.

Investing Principles for the Increasing Tax Burden Environment
All other things being equal, changes to the tax burden of companies and investors are not generally retroactive or post facto. This hard and fast rule of politics is in place to prevent politicians from killing the proverbial goose that lays the golden eggs.  Investors and markets require a degree of certainty when it comes to government policies.  If government changes the rules in the middle of the game, and then adds the additional burden of changing the rules in a way that impacts decisions made under the old rules, the capital markets face a significant downturn.  The markets become too risky because nobody knows what will happen next.  You can pretty much bank on this fundamental rule staying in place because no sane government wants their currency being valued the same as a pine needle.  Understanding these principles are the condition precedent to having the opportunity to time the market based upon pending tax code changes or negotiations of tax policy changes.

Timing is everything.  In the markets, we generally sell at the top and buy at the bottom.  The old Wall Street adage of, “buy on the sound of cannons, and sell at the sound of trumpets,” may be applied to tax investing when there are expected changes pending to the tax code that would be expected to create higher tax burdens.  The buy-signal is rather simple: the inevitable sell-off in the capital markets will be due to lower market capitalization perceptions of the investing-public.  Those perceptions serve to drive up capitalization rates for existing companies and new issuers, alike.  Comparatively speaking, the potential outcome is the opportunity to buy a Cadillac for the same price you would have otherwise paid for a Ford Explorer.  Your expectation for the net gain doesn’t really change; what changed was the nature of the opportunity.  Now you have the opportunity to potentially jump into Alternative Investments that offer particularly attractive risk profiles that have been hammered by the results of tax policy changes.

Investing Principles for the Decreasing Tax Burden Environment
When tax rates come back down, it pays to remember that capitalization rates would likely decrease as well, and that means the investments you make during the times when tax rates are comparatively high, are going to be likely to be worth more, all other things being equal, just due to the changes in tax policy.  It’s a potential built-in profit-taking opportunity that comes loaded into the Alternative Investment deal structure due to the fact most securities in Alternative Investment deals are not publicly-traded securities.  These private placement offerings represent securities that are, by and large, not publicly-traded. The lack of liquidity tends to have the impact over creating much larger capitalization rate spreads that would make an investment in a privately-held company, that must more attractive.

The attractiveness presupposes you have an exit plan.  You have to exit based upon those resulting changes in the capitalization rates.  The practical end-game here is to carefully review your default risk conditions owing to the fund and its investments.  You may wish to ask questions regarding the exit strategies owing to the investments (or any investment for that matter) and see if they are in fact being tailored to address this opportunity.  If they are, you may indeed have something worth pursuing – a fabulous yield opportunity both on the current and future basis.


Tax Code Changes Create Alternative Investment Opportunities

There are only two things certain in this world; death and taxes. 

Modern portfolio theory holds that mathematical equations and analytics data may be deployed to assemble a portfolio of assets that have relatively like risk profiles.  The goal is, of course, to outperform the market index as a whole by which the investor’s portfolio would be compared.  For publicly-traded portfolios, modern portfolio theory works fairly well – like every model (always wrong, but sometimes useful) – it has its wins and losses.  The winners (those funds having positive active returns) and losers (the opposite) continuously reassess their opportunities based upon seeking alpha.  This article represents the first in a series of articles in which we are going to explore the application of modern portfolio theory regarding investment opportunities that may be routinely accessed via the Velvet platform.  

We will dive in and take a look at the differences that create both issues for investors to consider.  We will also explore the opportunities that may be relatively unique to the Velvet platform and attending business model.  Most importantly of all, we are going to conduct this adventure in a way that avoids the complex equations and formulaic approaches that only interest financial services industries professionals in favor of more digestible topics and approaches.

__Is Alpha Relevant?__
There are many views, opinions, and assumptions that attend the application of modern portfolio theory.  Sooner or later, the information utilized to compute alpha (and the other attending calculations such as beta, R-squared, etc.) is reliant upon the assumption of comparison to essentially similar transactions and assets.  The challenge for today’s investor who is seeking Alternative Investments in opportunities sponsored by venture capital and private equity funds, is one of information validity.  It’s not a case where we find these funds are simply dishonest; no, far from it.  We find there are many proprietary processes and limitations on what may be disclosed for competitive reasons.  The practical impact of these requirements is to limit the exact kind of information that would be critical to the assessment of a risk profile that would actually be meaningful.  This fundamental issue may be the straw that breaks the back of using alpha in the context of the Alternative Investment, but other writers here on Velvet will surely disagree (and with good measure, I might add).  Either way, the discussion would indeed be one where the expectation is of spirited debate by which all parties gain knowledge and wisdom.

__Can We Quantify Risk in Alternative Investments?__
Risk is always the issue, isn’t it?  My experience tends to frame my own approach to investment loss risk prevention.  Investment loss risk exposure is, by and large, a product of certain key subjective financial risk elements.  When we boil these risks down to their root causes, the vast majority of these pesky gain destroyers can be structurally eliminated from having an impact on a given transaction.  The risks that really matter are those risks pertaining to the impact of market forces – mainly the continuing advancements in technology being introduced into the market, together with business innovations.  Technology advancements and innovations of business processes are facts of life in a healthy market economy.  They are a sign of the creative destruction that defines the human race and the glorious pathway of capitalism that made America the greatest country in the history of this planet.  How do we manage this beast?

__The issue is information.__
We do indeed live in the Information Age. The hallmark of the Information Age is the advancements in communications technologies for the benefit of mankind. Business and communications technology now gives us the opportunity to proactively monitor changes in consumer purchasing preferences that drive everything.  If you understand this fundamental idea, you now have the construct for proactively managing that one subjective financial investment risk that used to be taken for granted as being “baked into the deal” – market risk.
Sooner or later, almost every subjective investment risk is tied to market risk.  On Velvet, the platform concept is designed for near real-time exchange of information that would allow an investor to create the opportunity to proactively manage investment risk exposure on an ongoing basis within the Alternative Investment playpen.

Can we quantify risk in Alternative Investments?  Twenty years ago, the suggestion we could quantify market risk would be met with scorn.  I would submit to you that would not be the case today.  


Seeking Alpha – Part I

Modern portfolio theory holds that mathematical equations and analytics data may be deployed to assemble a portfolio of assets that have relatively like risk profiles.

When we think about investing, we have to think in terms of time.  Time is both our friend and our unrelenting enemy in this world. Many investors seek to optimize investment risk by taking a longer-term approach to their investing strategies and investment capital allocations.  In this article we will explore this topic a bit further in terms of the fund allocation opportunities that Velvet-listed funds may provide to investors in light of the goal of smoothing out the bumps and sudden turns on the road to investing freedom.

__You Have to Weigh In My Friend…__
The entirety of the allocation process for investing relies upon the idea of diversification – and funds listed here on Velvet focus on Alternative Investments.  As a general rule of thumb, Alternative Investments provide a higher risk premium due to the complexities of the resulting transaction structure or underlying business operations of the investments the funds make from time to time.  In my experience, Alternative Investments being made at the fund level provide a real opportunity to enhance returns and balance risks.  The funds listed on this platform have a commitment to the specialized underwriting and investment monitoring that comes with the Alternative Investment playpen. These specialized skills and approaches provide the basis for you to make some weighting assessments as you go thru your own investment selection and due diligence reviews.
Investment weighting is either done consciously or unconsciously, but we all do it.  In fact, we constantly weigh risks owing to all of our decisions in life, so being a conscious player on this platform has the potential for creating a long-term relationship that may be profitable.

__Assess Your Best__
A simple assessment process may be a great way to start your journey into selecting which of the funds listed on our platform rate your investment support. The general rule of thumb doesn’t change: all other things being equal, the higher the targeted return, the less likely it will be that the targeted return will be realized.  You will note the art of language regarding, “all other things being equal”.

Alternative Investments include both private equity and hedge fund opportunities on Velvet.  By definition, these funds are managed by specialists who recognize time-sensitive investment acquisition opportunities where a near-term or one-time profit-taking event has a high likelihood of being realized.  These opportunities tend to push the earnings potential well above the S&P 500, so we have to keep in mind the fact we are, more or less, using our access to Velvet like a private club where the better grade of players can be seen.  This makes the allocation strategy even more interesting, exciting, and potentially rewarding.

Take a hard look at your portfolio and ask yourself if you are willing to sacrifice your earnings potential in light of a longer-term objective.  Then ask yourself why you cannot have the opportunity to have that longer-term holding structure combined with the power of a significant alpha opportunity.


Playing Long Ball Using Fund Allocations

When we think about investing, we have to think in terms of time.  Time is both our friend and our unrelenting enemy in this world.

The securities regulations changes that went into effect this past March 1st provide for a new level of disclosure requirements that apply to private equity funds just as they do for all other companies seeking to issue securities.  These new disclosure requirements may be made to fit the round peg in the round hole via the Velvet fund listing program.  In this article we will explore the process of undertaking an investment review for a given private equity fund private placement offering from a global viewpoint.  In later articles we will drill down into some of the more specific issues and actions that may be worthwhile for you to explore.  For now, let us get our focus on an overall process that may be used to help you gauge whether an investment in a given offering may be warranted for your goals.

 Eye Candy vs. Analytics
The old saying of “never judge a book by its cover,” is very true when it comes to investing – especially investing in alternative investments, as eye-catching graphics won’t pay the bills or feather your retirement nest egg. Velvet recognized this investment imperative in the organization and conceptual design of the platform and services they provide to you.  The program starts with focusing on the four main elements which every professional underwriter takes issue in the process of approving or rejecting a given investment opportunity.

__Do You Believe in the Market Opportunity Presented?__
We live in a market economy, folks.  In a market economy, the winners and losers are chosen by consumers by virtue of the purchasing preferences these consumers make on an ongoing basis.  Market opportunity boils down to understanding whether it is reasonably likely the company (or companies, as the case may be) has a demonstrable opportunity to penetrate their market.  They must invest enough resources to imprint the value proposition that attends their products and/or services on prospective customers. The business must garner enough attention to generate sufficient ongoing sales to deliver the opportunity for you to receive a capital gain.  In the end, you must ask whether the totality of information available to you demonstrates a market opportunity may exist.  If it does, we can move to the next step.  If it does not the buck stops there, and it is time for the next deal.

__Do You Believe the Targeted Yield is Achievable?__
Companies not only have to attract customers, but they must also service those customers.  The cost of products, third-party services, and ongoing operations must be within a reasonable range for a company to have the potential opportunity to generate distributable cash flow.  We analyze the pro forma financial presentation and compare it to the company’s peer group, all the while assuming the new entrant will likely have a lower operating profit margin than their established peers.  Debt leverage will also play a key role in this process.  If the debt leverage is comparatively high versus the company’s peer group, then the potential for an investment loss may be a real prospect.  What is left after the costs of operations and costs of debt service (and any other priority payment obligations) are satisfied?  If the answer is the targeted yield (or another yield that would satisfy your investment goals and requirements), then we can go to the final step in the process, otherwise; we drop the deal and move to the next opportunity.

__Can Management Pull Off the Deal?__
If you put up your money, will management be responsible in managing your funds or will it end up going down a rathole?  Private equity companies sometimes offer diversified pools of assets because they know some assets and businesses will face unexpected financial reversals that could reduce distributions – some may even bottom out entirely.  With this potential reality in mind, the savvy investor looks to how the managers of the underlying businesses intend to manage execution risk, provide transparency in managing financial reporting, defend the shareholder’s interests against fraud and other claims, as well as comply with all the regulatory requirements that attend the business.  The depth of planning disclosures, experience of the management team, and liquidity reserves baked into the deal may speak volumes on the potential for management to be able to weather the storms that inevitably attend every life and every business venture.

__Ready to Push the Button?__
If we have completed a review and found the investment opportunity meets the goals and requirements, we have put on our investing program, then it is time to push the button.  The subscription process today is a bit more involved.  The private equity funds have reporting obligations to satisfy with federal and/or state securities regulators.  Be prepared for interviews regarding your financial affairs.  Be prepared to provide personal financial information, copies of your federal income tax returns, pay stubs, and complete questionnaires.  All of this happens before your investment is deemed acceptable.  In the meantime, your funds are lodged in an escrow account and if either party is not completely satisfied and wants to back out of the deal, you can before the final approval.  It must be transparent, and it must be safe for everyone.
Find out more about the subscription process and how to get there from here on Velvet.  The online resources are there to support the goals of the investor in a way that provides access for the private equity funds and other issuers who seek your business.


How Does the Private Equity Fund Subscription Process Work?

The securities regulations changes that went into effect this past March 1st provide for a new level of disclosure requirements that apply to private equity funds just as they do for all other companies seeking to issue securities.

Velvet presents a unique platform for gaining insight into private equity and venture capital fund investment opportunities in the field of Alternative Investments.  Alternative Investments, by their very nature, demand a heightened level of due diligence scrutiny to ascertain the facts that are so important to the investment decision-making process.  In this article we are going to explore the due diligence questions that constitute the starting point for undertaking due diligence regarding funds and their managers.

__Start With Understanding the Value Proposition__
Due diligence investigations require us to first understand the value proposition owing to the counterparty’s opportunity proposal.  If I am to receive a targeted return of “x”, I would have to first understand what conditions precedent would have to be satisfied in order for the targeted return of “x” to make its way to my bank.  Value propositions are based upon a business model the business intends to deploy for the purposes of sustaining ongoing sales sufficient to meet (hopefully exceed!) the revenue requirements the business requires to sustain profitability.  
Private equity funds and venture capital funds have a value proposition and you need to understand what the value proposition is going in the door.  The process starts by using the Velvet platform to identify an investment opportunity that appears to be attractive to you. The investment opportunity is based on the premise of the value proposition.  

__Supporting Elements of the Value Proposition Investigation__
Every value proposition has three common elements that serve as the linchpins of the research you would be well-served to undertake before you talk to the fund.  These three elements are:

•	Market Opportunity (i.e., “Do I believe a market opportunity exists of sufficient magnitude to support the business goals of this investment opportunity?”).  If my own research doesn’t demonstrate a groundswell of market opportunity well above the requirements for sustaining the business goals of the investment opportunity, I don’t need to talk to the fund manager, I need to move on to the next deal.  If I do “buy into” the market opportunity, then I am ready for the next task.

•	Targeted Yield (i.e., “Do I believe the capital gain opportunity I require potentially exists in this investment opportunity?”).  Issuers and sponsors make all kinds of claims regarding what the targeted capital gain opportunity will look like. All of these forecasts assume conditions in the future will be the same as they are right now.  We all know that outcome is not likely to be the case but using a crystal ball to forecast the future would not be a reasonable way to go, either.  I have to do some research on the business operations and risks associated with the value proposition of the subject company to determine if, all other things being equal, a potential capital gain is there for me to receive if it all works out as the sponsor claims it may in fact be the case.  If I buy into the targeted yield theory, then I’m ready for the third element.  If I am having trouble finding the business case evidence that supports, the capital gain I stop and go on to the next deal.

•	Execution Risk (i.e., “If I give these people my money can they pull it off?”).  Any sponsor or issuer worth their weight in salt can provide enough smoke and mirror show pieces to sustain the market and yield questions, but execution risk is a whole other matter.  Execution risk constitutes the coral reefs upon which many great deals are wrecked and sunk with all hands being lost.  Execution risk requires evidence that liquidity can be managed in light of changing operating conditions. The changing operating conditions require planning and reporting management systems and policies that serve as mitigation against loss.  If these plans and programs aren’t in the deal, then I have a real problem in moving forward.  Financial reporting transparency, fraud, regulatory compliance, insurance risks, employee risks, vendor risks, and a host of other risks must be dealt with before the money changes hands.  There’s an old saying, “the deal doesn’t get any better than the day you sign it.”  This holds to be true more often than not.  If management can’t be bothered to provide a detailed disclosure of how they intend to manage the future operations and cash for everyone’s benefit, then my answer is always the same: next deal, please.

With these issues being at the forefront of my due diligence approach, I’m ready to talk to the fund manager and get some more insight into what I should reasonably be expecting these people to accomplish.

__The Questions I Want Answers To Right Away__
My questions stem from my analysis of the expected value proposition.  Documents will state things for the record but sometimes they do not tell the whole story, so it’s best to compare the document disclosures to what the fund managers have to say about the deal.  I want to confirm the business points that pertain to the value proposition, so I will be asking:

•	How does the fund get compensated in this endeavor?
•	Are there any conflicts-of-interest that may potentially impact how the fund operates?
•	Where can I obtain information regarding the operating policies, procedures, and management reporting of the financial results of operations the fund will be observing?
•	If there are questions or matters that may lead to contention, who is the authorized representative of the fund that I can contact to obtain information and/or manage the resolution process?

Fees and costs are a potential real issue in fund investment.  Some funds attempt to place the cost of fund fees and compensation outside of the computation of the targeted yield, so I want to make sure the targeted yield is a fair representation of what I should reasonably expect regarding my own investment gain opportunities.

Conflicts-of-interest bear directly on the management of the enterprise. I want to know if there are any “insider” deals being contemplated that would potentially result in someone being unduly enriched at the expense of the investor.  I also want to know if the management of the fund will be active (as in full-time personnel being assigned to management of the portfolio) or if the real management will be undertaken on a part-time basis.  If it is the latter case, I want to know if there is the potential for this part-time management to become a material issue if things get dicey with a given investment or the entire portfolio.

We all want to know that policies, procedures, and reporting structures exist to help stave off execution risk failure.  While no battle plan is workable after you hit the battlefield, plans that work have redundancies built into them for the foreseeable contingencies that may occur.  If management hasn’t bothered undertaking this level of due diligence I need to move to the next deal.

Finally, contention is inevitable in business and what really matters is whether or not a pathway exists for differences to be addressed and resolution being provided.  Reasonable minds disagree all of the time on reasonable issues.  I want to know if the fund managers have thought through their resolution processes because what they do with my money may speak to how they undertake their relations with the companies they invest my money in on an ongoing basis.


Those Questions You Should Ask Every Fund Manager

Velvet presents a unique platform for gaining insight into private equity and venture capital fund investment opportunities in the field of Alternative Investments.

One of the most famous investors on the Street is a guy by the name of Peter Lynch.  Mr. Lynch was a player in Fidelity and grew their main mutual fund into a mega-fund by being an apparent genius at picking stocks.  Mr. Lynch wrote a book about his experiences (Beating The Street) that I found fascinating.  One of the things Mr. Lynch pointed out in his book was how his fund became a victim of its own success.  At a certain point in time, the sheer volume of transactions required to sustain the investment goals started to work against his investment approach that he applied to screening investments; there simply wasn’t enough time to make it all continue to work the way things started. The way things worked starting out is what turned out to be a big contributor to the Fidelity success story, and the success story and notoriety that Mr. Lynch enjoys to this day.

I use Mr. Lynch’s story as a way of pointing out that emerging funds have both a challenge and a real opportunity to create value for their shareholders that becomes a much harder task, all other things being equal, as the fund grows in size.  Economies-of-scale only go so far when you are talking about Alternative Investments where real underwriting and due diligence are a condition precedent to investment consideration.  In this article we are going to explore the issue of the emerging fund opportunity versus the mega-fund to point out why emerging funds become mega-funds.  You will figure out all by yourself the fact the people who have the ground floor position always seem to do okay in these transactions that end up becoming mega-funds.  
And isn’t that the point of all of this?

__The ETF Value Proposition__
Mega funds are typically electronically traded.  Many of them rely upon computer trading of other securities to make a profit an opportunity outcome that happens more often than not.  While this works well for the NYSE, the overall effect is one of not being able to beat the average return as a whole, as the impact of Rational Choice Theory dictates the market will always end up being one step ahead of your next trade.  It is important to remember that liquid investments are both a source of safety (i.e., I can get out right now if I want) and a source of extreme levels of risk (i.e., too late, everyone else already got out). The resulting impacts may be reasonably expected to include the issue of trading liquidity for nothing other than lower earnings that are expected to track with the market as a whole.  For many people this is a very acceptable outcome because capitalism and market economies tend to perform well over the long-term window, and most people are passive investors looking for their retirement nest egg to hatch at some point in the distant future.  Today’s ups and downs are not their concern – only the concern of the managers of these funds who tend to make those ups and downs profitable for their own interests.

__The Emerging Fund Value Proposition__
Alternative Investments logically belong in the emerging fund category.  The cogent argument being that Alternative Investments are the realm of elite investors and managers who have the specialized skills and knowledge of business affairs in the given investment vertical they can use to the advantage of the fund and investors to create gains.  The reality is those special skills don’t include a divining rod, instead; those special skills often include detailed due diligence assessments that involve real costs in time and money to verify the particulars of a transaction.  Most EFTs don’t have the capacity to do this kind of due diligence.  An emerging fund has both the capacity and the business model designed to exploit that capacity.  All other things being equal, the emerging fund would be expected to have comparatively huge near-term capital gain opportunities as opposed to those of the mega-fund, but again; those opportunities require the assumption of certain risks.


Why Are Emerging Funds Potential Better Investment Opportunities Versus Multi-Billion Dollar Mega ETFs

One of the most famous investors on the Street

Private equity funds entail a host of opportunities for investors.  Opportunities only come as a result of the implied bargain that is based on risks being assumed.  Private equity funds may be that one opportunity that bridges the gap between the passive investor who simply accepts whatever ETF their stockbroker is recommending this month and the active trader who acquires and disposes of investments for a living. 
One of the linchpins in the Velvet value proposition lies upon the private equity fund participation featured in the dashboard of the website.  That linchpin creates value-driven opportunities for both the managers of these private equity funds and you, the investing-public, who may be seeking something different from the proverbial ETF.  

Dig in and find out a bit more in this article about why private equity may be the answer to an itch you’ve been scratching when it comes to taking a more active role in your investing strategy and execution.
What Makes Private Equity Different From Venture Capital?
In today’s ever-confusing world of the financial services industry, the terms “private equity fund” and “venture capital fund” are used interchangeably.  Generally speaking, a venture capital fund is apt to make an investment much earlier in the lifecycle of a given business than a private equity fund.  Again, this isn’t a hard and fast rule, but it does typically differentiate between the two product lines.  It pays to ask.  When interacting with a fund thru Velvet, be sure to see the full disclosure on the fund’s objectives, how and when they invest capital, and the risk levels that may correspond to the relative maturity of the companies and/or projects they support. 

For Velvet, the focus is on alternative investments. Alternative investments are considered by FINRA and SEC to be potentially too risky for the general public to understand. Velvet’s alternative investment support program seeks to support more disclosure to investors coupled with easier to understand assessments of what these risks mean.  Our job as investors is to ask the tough questions and demand clear answers.

__Alternative Investments Via Private Equity Fund Investing__
As previously stated, alternative investments are not typically the investment choice of the new investment aspirant.  You crawl before you walk and walk before you run. Pulling the trigger on a single Alternative Investment out of the gate may place you in the position of having too much risk concentration.  If that one investment doesn’t work out, then your position and future capital gain expectations could take a hit.  That’s where private equity funds fill an important void in the capital markets.

The private equity fund represents diversification in a potential pool of various Alternative Investments.  This provides the opportunity to realize a return above the S&P 500 index (hard to do for most ETFs), while potentially balancing out the risk concentration issue by spreading your investment dollars across multiple issuers and multiple business/asset classes.  If one goes down the tubes, nobody is happy, but the mission may continue. 

Velvet recognized this fundamental stop-gap requirement that has the potential to satisfy the investor looking at Alternative Investments and wondering whether the risks and rewards are really worth it.  While there are no guarantees in any investment opportunity, the key requirement of risk diversification, combined with a higher targeted yield, makes private equity funds a potential stronger candidate for your investment support than you might have imagined.

__Getting Started on Private Equity Fund Investing__
Start your journey by reading the disclosures.  Talk to the fund managers if you feel that your questions require that human touch. While everyone typically focuses on the objectives of the funds, the fees, the dividend payout structures, and size of the investments, take the longer road and ask about how they mitigate potential loss events, handle financial reporting, and monitor their investments.  Higher returns come with higher risks, and those risks require you to be diligent in understanding how much oversight will be required to justify your decision to push the button and become the newest private equity fund shareholder.


How To Evaluate A Private Equity Fund

Private equity funds entail a host of opportunities for investors.  Opportunities only come as a result of the implied bargain that is based on risks being assumed.

Everyone likes to talk about the latest hot deal they managed “to get in on” thru their broker.  This entire issue brings up the topic of identifying opportunities for investment consideration that may offer the potential to become outstanding investment vehicles.  A transaction that, intentionally or otherwise, ends up far outperforming investment expectations usually fits the bill as having been a “ground floor” investment.  In this article, we will explore some of the common traits we find in these investments and give you a bit of insider information as to how these play out on Velvet. 

__Ground Floor Investing Rules__
We have to bear in mind that ground floor opportunities come with ground floor opportunity risks.  I live on the ground floor in my building and that sure is convenient for me as I’m an older guy who doesn’t like stairs.  What comes with the ground floor is the risk of a flood wiping out all my stuff.  Ground floor investment opportunities can be like that – real convenient ways to potentially make money, but with bigger opportunities come more risks that may turn out to be uncontrollable.  Bigger risks mean we have to have some rules to help us pick the most attractive opportunities in a sober light.

__First – Is The Market Opportunity There Or Not?__
We live in a capitalist society where consumers decide the winners and losers in business by virtue of the purchasing preferences of these consumers.  Understanding the product (or service) of the underlying investment(s) gives us hard evidence as to whether or not a real market opportunity may exist that could in fact be sustainable if everything worked out.  The only question is whether or not you believe the fund (or sponsor) does in fact have the “secret sauce” that would suggest to a reasonable person that the market is real and the company’s approach to capturing that market is also real.

__Second – Can The Targeted Yield Be Achieved Or Not?__
If you believed the market opportunity may in fact exist, the next issue is whether or not the market opportunity risk comes with a payday opportunity that works for you.  That payday is referred to as the targeted yield – the return on investment the fund or sponsor claims you should receive, all other things being equal, if everything works out.  You have to decide if the risk is worth the reward, and you alone.  
Third – Can Management Show Me How They Can Make It All Work Or Not?
Now we get to the big rub.  Any entrepreneur worth their weight in salt can provide a convincing argument as to why a market opportunity exists and how they can make you money by exploiting the market opportunity.  The rub comes when it is time for the entrepreneur to demonstrate they have the plans, policies, procedures, checks, and balances in place to keep the vehicle within those bright lines, right?  That’s execution risk and Velvet preaches execution risk management to the funds listed on the platform, and in continuing discussions with the management team of these funds.  The real players never tire of discussing it, fixing it, making it better, and delivering value based on managing risk.  It’s their life.

__Velvet Funds Answer The Call__
On Velvet you will find many opportunities to choose from for investment consideration.  The funds and fund managers who list on Velvet all seem to share a pathos for due diligence and transparency in the investments they intend to make using your funds.  These funds and fund managers have to answer to you, the SEC, FINRA, and securities regulators in each state where they do business.

The key is in understanding the value of underwriting due diligence these fund managers are apt to deploy for their own benefit – that’s right, their benefit.  You see, the fund managers all know that for them to prosper, they have to do everything in their reasonable power to ensure you get what they reasonably believe to be attainable.  
Fund managers and funds are really only as good as the results they have achieved (or not) over the past 12 months.  They have to be extremely diligent in selecting transactions that meet the fund’s investment objectives, comply with the regulatory requirements, and have the kind of management that consistently demonstrates the management team’s ability to deliver on their promises and forecasts.
Now we can look at the ground floor.

__Going Up__
One of the hallmarks of ground floor investment opportunities is the stage of the subject company’s lifecycle.  Typically, funds invest or acquire opportunities (for the benefit of their investors – meaning you) when the plans are well-established but not as yet fully executed.  The investment targets are ready to acquire all of the income-producing assets, build their properties, or otherwise get the things these companies need to actually start operations.  It all goes up from there.

__Launch It__
Some funds specialize in making investments right after a company has launched operations because these companies typically can demonstrate the market has accepted their business model (by virtue of having made some level of actual sales) but is not yet in the black.  This is launch stage investing and has risks to be sure but not as many risks as a company that has not even assembled, acquired, developed and/or constructed the stuff the company needs to actually operate on an ongoing basis.  They want to get into market and grow, and that’s where the launch pad for a ground floor opportunity might become evident to everyone.  Launches have expected increases in future earnings that are well above the cost of the investment, so the potential for larger returns exist in these deals.

No matter what you choose, you already became a member of the Velvet platform way of obtaining opportunities to potentially dramatically change your approach to your portfolio.


What’s The Ground Floor Look Like

Everyone likes to talk about the latest hot deal they managed “to get in on” thru their broker.

Alternative Investments are investments that require a more measured approach to understanding investment risks and the rewards that may come from assuming these risks and putting our investment dollars on the table.  Once we understand the basic premise that riskless investments only exist in theory, the savvy investor awakens and understands that risk is in everything we do, so we might as well play for the whole pot and not petty table stakes.  In this article we are going to explore some of the basic tenets of Alternative Investments that have the potential to unleash capitalism for our benefit when we align our risk appetites with the potential rewards that Alternative Investments hold out as a potential outcome.

__The Money is How We Keep Score__
Alternative Investments provide opportunities to realize significant capital gains based upon some very simple business model scenarios:

•	The Time Model.  Hedge funds and private equity funds use market signals within a relatively narrow period as the basis for trading capital for assuming a short-term risk.  Put simply: they see a fellow trying to dig his way out of the swamp and give him some short term help to prevent catastrophe, then profit by taking a portion of the money the fellow made as a result.  There was a risk the swamp would swallow the guy to be sure, but by being there at the right time, an opportunity was created to help solve a real problem and make a profit from doing so.  In one form or another, the time model is a key Alternative Investment approach to creating gains for investors.

•	The Lifecycle Model.  Like all things on planet Earth, businesses have lifecycles.  As a business matures and moves along the lifecycle chain, incremental gains in value are created for the benefit of the financial stakeholders in that business.  The earlier in the lifecycle a given business investment is undertaken, the more likely the outcome will be one of an incremental gain that can be an order of magnitude increase in equity value.  Alternative Investments in commercial real estate are a prime example of the lifecycle model.  I am a commercial real estate guy, having developed properties as well as having been a capital finance consulting on billions of dollars in new construction projects.  Every new construction project starts with a piece of dirt where there is nothing but weeds and trash.  By some feat of utter magic, a few months (or years, as the case may be) later, a building appears on said patch of dirt that houses people or businesses.  The building created jobs, careers, and wealth.  Where did it come from?  It came from an idea that was put into action, and those actions created wealth opportunities.  
Alternative Investments include investment opportunities where wealth is created where no wealth previously existed.  Let that sink in.  That is the power of free markets and entrepreneurs solving problems and benefiting from their resolution.

Some investments will work out and some will not work out.  That is risk playing out in the form of the business managing the risks of executing its own plan.  Once we understand our job as investors is to dig into those plans and see if they appear to be reasonably well thought-out, reasonably well funded, and reasonably managed, we unleash the power of creating wealth where none existed.

I do not know about you but I hate the idea of begging for a slice of someone else’s pie when I know I can bake my own pie and take whatever slice I decide I would like to eat.  Alternative Investments are about baking your own pie, so bake the pie and invest knowing there is plenty to go around.


Alternative Investments: The Shape of Things to Come

Alternative Investments are investments that require a more measured approach to understanding investment risks and the rewards that may come from assuming these risks and putting our investment dollars on the table. 

When I talk to clients who are seeking to undertake a securities offering, the typical reaction to a discussion of the process almost always ends with “this is like drinking thru a firehose, Clint.”  The point being, securities offerings involve an extraordinarily complicated – and sometimes Byzantine – process for the issuer, and that got me to wondering what investors may wish to know about the end-product they typically see on the Velvet platform.  In this article, we are going to explore some of the painstaking agony the funds and fund managers have to endure in order to provide you with an Alternative Investment opportunity.

__Raising Capital Takes More Than Handshakes__
Setting aside the legendary deal-making that happened on popular television shows like Dallas, raising capital involves one of the most highly-regulated business activities in the U.S. today.  The regulations focus on preventing investors from being defrauded out of their funds by unscrupulous businesspersons seeking to gain at someone else’s expense.  The key players in the financial services industries all live within these regulations as a rule, so the resulting operating construct of our capital markets reflects standards and practices that are founded on the regulations.  For a company seeking to raise capital financing in our markets (including on Velvet), everything the principals say, and all written communications are subject to legal scrutiny.  Under the new regulations that went into effect on March 1st, even pre-offering communications are now subject to review and examination by the Securities & Exchange Commission.  The practical result is one of committing everything to writing – your word is no longer good enough, and your handshake won’t cut it.  The regulations force underwriting and due diligence professional like me to take nothing for granted – everything presented in the offering circular has to have independent verification or it just shouldn’t be in the document.

So, what does independent verification look like and how does the average investor on Velvet recognize the importance of this verification process regarding their own interests?

__No Détente, No Trust – Just Verify Please__
Ronald Reagan famously said, “trust but verify,” in speaking about the arms control treaties with the former Soviet Union.  The securities world goes a step beyond this axiom by assuming everything the sponsor/issuer states is subject to conflict-of-interest, so provide independent proof regarding statements of fact that are in the offering memorandum.
Statements of fact have to have an independent source that a reasonably conservative third-party would reasonably conclude represents, all other things being equal, the expected outcome.  The expected outcome then becomes the issue.  If things change regarding a given factual issue or circumstance, is the change going to be materially significant?  The interpretation of material significance is what creates the exhaustive underwriting review process that funds and fund managers are required to undergo for every investment they make on behalf of you, the investor in their fund.

__The Impact of Regulatory Requirements on Due Diligence__
The underwriting reality is that all aspects of the market opportunity have to be examined.  As a general rule, market risk is subject in nature, so there is a bit of latitude in terms of what constitutes a supportable market opportunity and what does not constitute a supportable market opportunity.  Reasonable minds frequently disagree as market opportunity assessments involve the creation of market models regarding demand and future sales, all of which cannot be 100% certain as to future events – and that’s the rub, isn’t it?  We live in a market economy where consumers decide the winners and losers in business by virtue of the consumers’ purchasing preferences.  Purchasing preferences change constantly due to a variety of factors we cannot accurately predict at any given time and that creates the risk of loss that investors have to receive compensation for in exchange for providing capital to the deal.  

When it comes to securities offerings, sooner or later, everything is tied to the sales revenues the future business may be able to sustain – that includes the value of the business (now and later) that is used to determine the amount of capital financing the business concept will support, as well as the reasonable limitations on earnings and distributions.  If the market forecast becomes inoperable, the resulting earnings and distributions will in fact change from plan.  
Credit underwriting takes these issues into account and the wise fund manager seeks to make sure they are making investments in companies and projects that allocate significant operating reserves in case of those inevitable rainy days (like a pandemic), so the business has a chance at weathering the storm and recovering.  This is an incredibly painstaking process that results in many transactions being rejected (you get to see only a sliver of the total number of proposals that a fund typically reviews).

If everything else looks relatively okay, the big hurdle now comes for the proposed transaction: execution and default risk reviews.  In the end, it doesn’t matter if a business has an astounding market opportunity or gigantic reserves if they cannot execute the proposed business.  Execution risk reviews kill more deals than anything else.  The underwriter has to review business operating plans, ERM plans, employee management plans, conduct separate investigations, and document the findings.  In the end, the investment committee will want comfort in knowing the chances of the investment failing due to poor management are remote, all other things being equal.

__Now You Get an Offering__
Once all of the due diligence has been completed, we can start looking at a real, live offering opportunity.  The offering process involves a host of players that have to come together and work in close coordination in order to get an offering into market.  Accountants, auditors, legal advisors, consultants, tax advisors, marketing experts, compliance experts, business managers, the principals, fund management team, and regulators may all have to work together to get to the point where something actually gets filed, posted, and made available to you to consider.  That’s a ton of work, cost, and risk for all of the parties involved, and then the answer is only a maybe, maybe not.


There’s More to Offerings Than Offering Circulars

When I talk to clients who are seeking to undertake a securities offering, the typical reaction to a discussion of the process almost always ends with “this is like drinking thru a firehose, Clint.”

Alternative Investments – and the process that attends investments made in these companies and assets – are subject to complex regulations that create complexities.  The new securities regulations that went into effect on March 1st of this year have the potential to make the investment process even more frustrating.  In this article we are going to explore some of the issues Velvet recognized as serious pain points for both investors and fund managers, together with the unique solutions Velvet has incorporated into the new platform that is pending launch in August.
Velvet’s management team realized the launch of the Velvet platform would only be a potential win-win if the investment onboarding process could be brought to a level of activity that incorporates meaningful automation with protections for all parties. The underlying concept that drives the Velvet business model is the creation of a win-win scenario based upon combining platform technology with Information Age access.  

Nature of the Beast – Alternative Investments Require Extra Diligence
Alternative Investments are defined by the regulators (principally, the SEC and FINRA) as being risky investment opportunities that require a heightened level of scrutiny and due diligence by all parties. Accordingly, the subscription process tends to get out of control pretty quickly, and that makes for a lose-lose outcome where prospective investors become frustrated with what appears to be a drawn-out process, and fund managers become frustrated with lost investor subscriptions because of the same process pitfalls.

That’s where Velvet’s business model is positioned to create the value proposition that is the Velvet platform design.  The Velvet platform is designed to engage you on the basis of making a given offering earn your commitment of time and resources at each stage.  The design serves to define the myriad tasking that defines Alternative Investments into four (4) component segments of activity, each being limited in scope and time that is earned by the given opportunity.  
Start With Opportunity Reviews
Your biggest commitment of time and resources comes in the initial opportunity review.  You will select the opportunity and access the offering memorandum. The offering memorandum has all of the attending disclosures as to the nature of the business, the potential financial results of operations, the nature of the management team’s reporting, and attending risks of the operations. Your due diligence regarding the market opportunity, potential yield, and attending risks of investing constitute the key pillars of your own underwriting review, as well as that of your legal, tax, accounting, auditing, and other professional advisors. If the transaction doesn’t meet your goals and requirements for investing, the show stops right there; on to the next opportunity.  If it does meet with your satisfaction, then it has earned the right for a potential subscription offer.

__Move to Subscription Tenders__
Now we are ready to get serious about the investment process and Velvet makes it easier by aggregating the necessary information requirements in the portal, with electronic signatures being acceptable, and electronic fund transfers to make it convenient. The subscription documents are fully completed when you download them, you simply provide the information that is required for regulatory compliance regarding your status as an investor, and the platform processes everything else. If the results are to your satisfaction, then you push the button and move on to coming to grips with the investment risks disclosure.

__Understand Investment Risk Limitations__
Investment risks are subjective in nature, and the one thing that is certain in a market economy is that change is ever-present and welcome. Yet change also has the potential for violent destruction when market disruptions occur. Most recently, the advent of e-commerce has dealt a telling blow to bricks-and-mortar retail giants (e.g., Sears, Toys-R-Us, etc.) that would not be reasonably expected to be foreseeable outcomes just 10 years ago.  Alternative Investments have the potential to present complex risk issues that must be clearly understood, lest accusations of fraud result when things sometimes don’t turn out as planned.  Velvet’s approach is to have the issuer provide as much detail as the issuer possesses regarding the nature, scope, and potential impact of unforeseen and foreseeable subjective financial investment risks to all investors. This added layer of investment security and scrutiny is designed to help ensure each investor is fully cognizant of the nature of investment risks that attend the targeted yield the issuer seeks to provide in exchange for your investment dollars.  If this is suitable, then you push the button and then more magic happens.

__Become an Investor__
After you have completed the investment subscription and risk acknowledgment functions, the issuer (the company/fund offering the securities) must review the application, the subscription, and the rest of the information to determine if everything meets with regulatory requirements, as well as the goals and requirements the issuer may have regarding the admission of new investors.  You get the final notice – and still have the opportunity to change your mind up to the date of final settlement notice.  This keeps everyone engaged and treated fairly.
For the investor, the Velvet platform approach potentially reduces a task that used to take weeks to as little as a few hours. That’s efficient, that’s less frustrating for investors, and that makes the Velvet platform and business model approach a potential win for everyone.


A Platform Designed for a Win-Win

Alternative Investments – and the process that attends investments made in these companies and assets – are subject to complex regulations that create complexities.

Velvet provides access to a host of investment opportunities being streamed by select private equity funds and venture capital funds.  Each of these opportunities represents a unique investment proposal with its own attending market opportunity, targeted yield, and execution risk management support program being fostered by the fund management team.  The expected outcome for the investor who is a Velvet insider is a veritable storm of Alternative Investment opportunities.  In this article we are going to further explore some of the basic steps that may help you make the call on which of these exclusive private placement offerings may warrant your investment support.

__Understand the Business Deal__
Every private placement offering provides what is known as the “Description of Securities” – an overview of what the issuer (i.e., the company seeking investors) is offering (hence the term, “offering”) to the subscribers of the offering (you being a potential subscriber) who have subscriptions accepted by the issuer.  

The Description of Securities provides a summary of voting rights, the construct of the interests (i.e., what an “interest” is defined as and how much of the issued securities an interest will represent), the pricing, the intended distribution or dividend rights, how long the issuer thinks the investor will hold the security, the required number of interests that have to be sold, and how the issuer plans to distribute (i.e., sell) the securities being offered.

The Description of Securities is the baseline business deal between the issuer and the investor, so it is a good place to start the process as it provides you with enough information to potentially analyze the financial forecasts and other disclosure information.  

__Understand the Financial Forecast__
The offering will contain a pro forma financial forecast – a presentation of the future financial outcomes the issuer thinks may happen if everything works out the way the issuer believes it will work out and assumes conditions don’t change.  

The savvy investor always takes the financial forecast apart by testing the assumptions that went into the forecast to see if they are reasonable assumptions, given the investor’s understanding of the business opportunity, and then comparing the investor’s analysis to the financial forecast.  Money is how we keep score in the investing game, so understanding how much money you can realistically expect to make from the deal is critical to making the call to invest in a given offering opportunity.  The Description of Securities provides you with enough information to do the math and see how dividends or distributions may in fact play out in the deal based upon your own forecast and due diligence.

__Understand How Gains Will Be Paid__
Now we get to a very interesting aspect of every investment – risks owing to the actual payment of gains.  Yield maintenance risk and distribution payment risk are subjective financial investment risks that must be clearly understood before you make the call and invest in a given opportunity.  

My question is always the same: if the business does make a profit that would otherwise be reasonably considered a profit investors are entitled to receive, what document tells me definitively that I will in fact receive my share? The shareholder agreement, partnership agreement or operating agreement will provide definitive information on how the distributions or dividends (as the case may be) will in fact be moved from the business to the investor.

Now that I have the basics, I’m ready to ask some detailed questions of the fund management team.  The answers to my questions tell me whether I should make the call to invest or make the call to move on to the next Velvet opportunity.


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