Frequently Asked Questions

Alternative investments are generally understood to be investments that are distinct from traditional stocks, bonds, and cash. Examples include private lending, hedge funds, private real estate, private equity, or venture capital. As a private real estate investment, Wingspan’s investment strategies would generally be an alternative investment under the umbrella category of “real assets” or “real estate”.

The alternative investments market has been experiencing significant expansion in recent years. As a result, this asset class has become available to investors beyond the institutional investors that historically dominate this landscape. For example, Fidelity estimates that approximately 86% of institutional investors – such as pensions, insurers, and endowments – invest in alternatives. Advisors have been exploring allocations of client portfolios to alternative investments and managers are increasingly looking to expand their capital base to individual investors. This trend looks to continue as investors and managers seek opportunities in the face of a variety economic forces, such as inflation, interest rates, uncertainty, and heightened volatility.

Given the market trends, Wingspan and other alternative investment managers have been turning to advisors and their clients as interested prospective investors in their projects. Wingspan’s entities are typically organized as limited liability companies under state law that are taxed as partnerships and are intended to be exempt from registration under the Investment Company Act of 1940, as amended (the “Company Act”), under one or more exemptions or exclusions. Wingspan’s entities directly and indirectly invest in, own, and manage real estate assets, both alone and with other partners. Readers of this FAQ should review the relevant offering documentation for more information regarding the regulatory framework and structure applicable to each Wingspan entity and its corresponding real estate investment strategy.

Advisors (including Investment Advisers) are permitted to recommend alternative investment strategies to clients, subject to its advisory relationship taken as a whole. Along with the growing market of alternative investments, advisors have also been increasingly recommending alternative investments to their clients who are suitable for certain investments and want to gain exposure to these alternative investment opportunities. With many barriers, such as manager access, perceived costs, illiquidity, and high investment minimums, starting to lessen, it appears the market trends will continue to drive investor capital into alternative investments, through advisors and other means.

As with any other potential investment considered by an advisor for a client, the advisor should consider the scope of its engagement with its client and whether the client meets the qualifications required by the alternative investment sponsor. Further, as advisors are re-evaluating participation in these markets, advisors have recognized that alternative investments can also carry complex characteristics and require a different process for clients to invest, as compared to other markets. Investment Advisers should also be aware of their additional regulatory obligations in evaluation of alternative investments. See, e.g., the discussion of due diligence elsewhere in this FAQ.

Additionally, investors in an alternative investment will also need to meet the criteria required by the manager. There are generally three categories of investor that a manager of an alternative investment vehicle will look for:

First, whether the investor is an “accredited investor”. A variety of individuals and entities meet the qualification of an accredited investor, which allows the issuer of securities to qualify for certain exemptions from registration of its securities under the Securities Act of 1933, as amended – i.e. remain a “private company”. Second, whether the investor is a “qualified client”. A qualified client is a slightly higher threshold than accredited investor and is important for Investment Advisers as it allows Investment Advisers to charge performance-based compensation (e.g. carried interest) to investors. Sponsors may be registered Investment Advisers themselves and this qualification may be key to the sponsor economics in an investment vehicle. Third, whether the investor is a “qualified purchaser”. A qualified purchaser is often thought of as an “institutional” investor, but individuals can qualify as well with a higher threshold of wealth or investments than other classifications. The qualified purchaser designation is important for the sponsor of an investment vehicle as it allows for a more favorable exemption from the Company Act for that vehicle.

Advisors considering an allocation to alternative investments should be mindful of these and other requirements of a sponsor when considering or recommending an investment to a client.

The fundamental tenets of the Advisers Act remain applicable - Advisers are fiduciaries and thus must act in their clients’ best interests. Investment Advisers should consider their duties to their clients under the Advisers Act when reviewing and allocating investments to alternative investments.

Advisors who are not Investment Advisers should consider the standard of care applicable to them when recommending or evaluating alternative investments.

The SEC has taken note of the increased allocation by Investment Advisers into alternative investments. When advising clients on alternative investments, the duties of the Investment Adviser continue to apply to such activities. In light of the complexity and more specialized nature of private markets transactions, the SEC has noted certain risks that face Investment Advisers in these markets; namely, in performing diligence and evaluating these investments. Investment Advisers should consult with their legal and compliance advisors regarding best practices to implement alternative investment programs for their advisory business and clients.

Advisors do not take a uniform approach to the question of fees in relation to these investments. The ultimate answer to this question should be determined by the advisory relationship with a client and advisor and the contract applicable to such relationship. If an advisor charges a fee based on assets under management of the advisor, for example, the fee may apply to alternative investment assets. One source of friction that we hear is that the manager of the investment strategy also typically would charge a management fee to the investors in the strategy. These fees vary by the underlying investment strategy but are usually committed capital or asset based. This creates a situation where a client may view it as paying twice for similar management services.

Some managers, like Wingspan, are willing to work with advisors to waive fees or otherwise find a fair solution that works for the advisor and the client. It is important to note for Investment Advisers that certain structures that grant favorable treatment on fees or other economic terms may be viewed as a referral fee under the Marketing Rule and with respect to certain conflicts of interest (see discussion on both of these below in this FAQ).

With respect to an Investment Adviser that exercises discretion to purchase alternative investments on behalf of its clients, the SEC has suggested such Investment Adviser determine whether such investments: (i) meet the clients’ investment objectives; and (ii) are consistent with the investment principles and strategies that were disclosed by the manager to the Investment Adviser (as set forth in various documents, such as advisory disclosure documents, private offering memoranda, prospectuses, or other offering materials provided by the manager of the alternative investment). Investment Advisers are encouraged to review the SEC’s Risk Alert on due diligence of alternative investments, available here.

Where an Investment Adviser is not making a discretionary decision on behalf of a client and the client is making the decision on its own for an allocation to an alternative investment, it remains prudent for an Investment Adviser to propose the client undertake a due diligence process. The facts and circumstances of the Investment Adviser’s involvement and the overall relationship with the applicable client will drive what type of process the Investment Adviser engages in.

Advisors who are not Investment Advisers are encouraged to also develop an understanding with their clients regarding the approach to evaluating alternative investments and consider such approach in light of the standard of care applicable to the advisor.

Advisors should develop a due diligence process for alternative investments. Such process would typically include operational diligence, legal document review, review of liquidity, onsite visits and other meetings with the manager, and review of financial statements, if available. For Investment Advisers, the SEC’s Risk Alert mentioned above provides helpful information about setting up a due diligence process for alternative investments.

Alternative investments are typically private securities offerings undertaken by the alternative investment sponsor and can be significantly different from other asset classes in structure, form, and market norms. These differences, and the complexity associated with these structures, should be considered when developing a due diligence process.

Advisors and clients may engage several service provider professionals to perform diligence and ongoing relationship and information management, including professionals such as auditors, accountants, and legal counsel. Further, advisors may prefer in some instances to engage with an alternative investment sponsor who has a third-party fund administrator. Such administrators provide an independent eye on the sponsor’s operations with respect to valuations, accounting, and record keeping, among others. Depending on the underlying alternative investment strategy, this may be appropriate. Additionally, many advisors will perform background checks and other regulatory checks (e.g. FINRA BrokerCheck) on the sponsors. In the case of a sponsor that is also a registered or unregistered investment adviser subject to the Advisers Act or a state-level analog, the advisor may elect to review the sponsor’s Form ADV, if applicable, and other related materials.

Advisors should consult their legal and compliance counsel to develop a process that works for them and their clients. Additionally, Investment Advisers should consider incorporating its due diligence process into compliance policies and procedures and reviewing such process annually.

Advisors may share the underlying documentation of an alternative investment with a client as part of the diligence process. The degree of discretion used by the advisor in evaluating the documentation will be driven by the advisory relationship. Some advisors will have the ability to direct client funds into alternative investments; and others will be more constrained, and the client will make the evaluation and decision on a prospective investment.

It is important to note that material provided by an alternative investment sponsor is often not made with an Investment Adviser in mind and/or will contain information that is focused on compliance with the private securities offering laws and regulations or other relevant regulations applicable to the underlying investment vehicle as an issuer and not as an Investment Adviser providing information to clients.

Importantly, for example, there may be instances when the offering materials contain hypothetical performance data (e.g. cash or value projections for an underlying asset). The Investment Adviser would be prohibited in certain instances from making statements like these to clients under recent amendments to Rule 206(4)-1 of the Advisers Act (the “Marketing Rule”). The Investment Adviser should be mindful of application of the Marketing Rule while passing along materials to clients, and in particular, special attention should be paid to any adoption or entanglement by the Investment Adviser of such materials. In some cases, the materials could become attributable to the Investment Adviser and the Investment Adviser could inadvertently trip the Marketing Rule. Many Investment Advisers have been comfortable passing along underlying offering materials without modification or recommendation so that a client can undertake its own review.

As mentioned elsewhere in this FAQ, alternative investments can be complex and have different standards or norms of disclosure as a private securities offering than other investments, such as public equities. Advisors should engage in a thoughtful due diligence process and be aligned with their client on the degree of discretion or other review that the advisor will undertake. Additionally, there may be a need for supplemental disclosures that the advisor provides to a client. For Investment Advisers, these typically touch upon key areas of an Investment Adviser’s obligations, such as with respect to custody, reporting, fees, and conflicts. Additionally, if an advisor syndicates a special purpose entity for its clients to make an investment in an alternative investment vehicle, additional offering documentation for such special purpose entity is advisable.

Custody. It is likely that an Investment Adviser would be deemed to have custody of the securities issued by the alternative investment vehicle. These securities are often not certificated; however, the Investment Adviser should consider how it would approach holding custody of the underlying investment on behalf of its client.

Recordkeeping; Reporting. The recordkeeping requirements of the Advisers Act will continue to apply. Since alternative investments are private securities, the investor reporting is often set forth in the applicable investment vehicle documentation. Additionally, if the investment vehicle engages a third-party administrator, the administrator usually maintains certain records and makes available certain reports and records to investors (or their designees). Clients may ask Investment Advisers to be the point of contact with a sponsor or administrator and to keep track of records on their behalf. The nature of the records may be different, but the Investment Adviser’s obligations under the Advisers Act remain. Advisors who are not Investment Advisers should also consider the degree to which the advisor will be the point of contact or keep certain records for its client in light of the particulars of the advisor’s client relationship.

Integration Into Ecosystem. Depending on the structure of the alternative investment transaction, the Investment Adviser may want to ensure that an alternative investment is compatible with its overall operational ecosystem. Sponsors are often willing to accommodate certain amounts of integration – whether by the investor (client) opting for the Investment Adviser to be the point of contact for the investment vehicle/sponsor or by providing online portal access to the Investment Adviser. Like developing other processes around alternative investments, an Investment Adviser should consider setting up infrastructure to serve clients who are making investments in alternative investments. Advisors who are not Investment Advisers similarly want to ensure compatibility with their operational ecosystem and the same considerations would apply even though the regulatory treatment may be different.

Conflicts. Conflicts of interest can often arise in alternative market transactions. Prefatorily, an Investment Adviser should consider the disclosures it has made in Form ADV and ensure consistency with other disclosed conflicts. Even though Investment Advisers have particular considerations with respect to conflicts of interest, all advisors (including Investment Advisers) should be mindful of potential conflicts and consider what would be their obligation to disclose such conflicts or refrain from undertaking transactions that would result in certain conflicts. While advisors should monitor conflicts of interest in alternative investments they recommend to their clients, one area that seems to arise frequently is around issues of fees. As mentioned above, there is a potential a client could view fees charged by a manager of an alternative investment and its advisor as “double dipping” on fees. Sponsors may address this by offering a fee waiver to clients of advisors who allocated their client’s capital to their vehicles. This presents a potential conflict whereby an advisor may have an incentive to recommend one alternative investment over another – either because the advisor is forced to waive their fee or because a sponsor waives its fee (allowing the advisor to still charge its fee). Advisors should thoughtfully approach these issues in discussion with sponsors and disclose potential conflicts accordingly. Additionally, if an advisor sits on an advisory board or is otherwise involved with the sponsor, the advisor may receive a portion of the promote or carried interest of one or more underlying investment vehicles. Advisors should consider the potential conflicts of interest that would be attendant on accepting such compensation from a sponsor.

Referral Fees. For Investment Advisers, the Marketing Rule (discussed above) modified how certain client referral fees are viewed as a referral falls under the testimonial and endorsement provisions of the Marketing Rule. There are several forms of “compensation” that would be considered a referral fee paid by an Investment Adviser for a client. Investment Advisers and sponsors who are Investment Advisers should be sensitive to these issues to avoid tripping the Marketing Rule when structuring a relationship or providing something of value for a client referral and to make appropriate disclosures in accordance with the Advisers Act.

Advisors frequently will syndicate a vehicle through which their clients invest in an alternative investment. This allows the sponsor to have a single investor on their books and enables the advisor to streamline reporting and take on certain administrative duties across multiple clients in an efficient way. Typically, this vehicle becomes a “private fund” advised by the advisor. A “private fund” is typically thought of as entities that would be an investment company under Section 3 of the Company Act absent an exemption under Section 3(c)(1) or 3(c)(7) of that act. If the advisor is not an Investment Adviser, the advisor may implicate the Advisers Act by virtue of this structure. There are structures for these vehicles that vary in risk profile for the advisor and the advisor should consult its legal and compliance counsel when structuring vehicles of this kind. The investment by the client into the vehicle set up by the advisor would by itself be an alternative investment transaction and carry with it independent compliance with private offering rules, the Advisers Act, and the Company Act (e.g. the vehicle would need an exemption from registration under the Company Act).

So, while possible to use these types of vehicles, advisors should consult their appropriate counsel on structuring and implementing these sorts of vehicles.

While not exclusively an issue when a syndicated vehicle is used, that is where the discussion around performance compensation often arises. In this context an advisor may want to charge the investors in a syndicated vehicle (e.g. the advisor’s clients) a carried interest or similar type fee or profit allocation based on the ultimate performance of an alternative investment, such as a Wingspan project. The Advisers Act generally prohibits performance compensation with respect to registered Investment Advisers. However, one exception is if the client is a “qualified client” (the category discussed above in this FAQ). For this purpose, the syndicated vehicle is not the “client” but rather it is the investors in the syndicated vehicle who would need to meet this test. Advisors should consider whether performance compensation is key to an underlying transaction and consult with their counsel to structure appropriately for their status and situation.