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Arman Salavitabar, CFA

Arman Salavitabar, CFA

Founding Partner, FundFront

Insights

Why Feeder Funds are Outdated and Bankable Products are the Future

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Historically, feeder funds have been the primary vehicle to open access to alternative investments. However, the traditional feeder fund model is becoming increasingly outdated. Today, bankable products offer a more efficient, scalable, and investor-friendly approach. In this paper, we will explore the limitations of feeder funds, the advantages of bankable products, and why the latter represents the future of alternative investments.

The Feeder Fund Model: A Legacy System

What are Feeder Funds?

Feeder funds are investment vehicles that pool capital from multiple investors to invest in a master fund, which then makes the actual investments. This structure allows smaller investors to gain exposure to alternative assets, such as private equity, hedge funds, and real estate, which they might not access individually due to high minimum investment requirements.

Limitations of Feeder Funds

1. Complexity and Cost

Feeder funds involve a multi-layered structure that adds complexity to the investment process. The additional layers of administration and compliance translate into higher operational costs, which are often passed on to investors. These costs can erode returns and make feeder funds less attractive compared to more streamlined investment vehicles.

2. Liquidity Constraints

One of the significant drawbacks of feeder funds is their illiquidity. Investors are typically locked in for extended periods, sometimes several years, with limited opportunities for redemptions. This lack of liquidity can be a significant deterrent for investors who may need access to their capital on shorter notice.

3. Transparency Issues

Feeder funds often suffer from a lack of transparency. The multi-tiered structure can obscure the underlying investments, making it challenging for investors to fully understand the risk and performance drivers. This opacity can undermine investor confidence and complicate the due diligence process.

4. Regulatory Challenges

Navigating the regulatory environment for feeder funds can be arduous. Different jurisdictions have varying regulations, and ensuring compliance across these can be resource-intensive. This complexity can limit the scalability of feeder funds and pose barriers to cross-border investments.

Bankable Products: The Modern Solution

What are Bankable Products?

Bankable products refer to investment opportunities that can be bought and sold directly through bank and brokerage accounts. These can include securitized debt instruments, tradeable notes, or traditional funds that have been standardized. The key characteristic of bankable products is their liquidity and ease of transaction within the banking system.

Advantages of Bankable Products

1. Enhanced Liquidity

Bankable products are designed to be easily bought and sold through bank and brokerage accounts, providing investors with greater liquidity. This flexibility allows investors to enter and exit positions more readily, aligning better with their liquidity needs.

2. Cost Efficiency

By eliminating the multi-layered structure of feeder funds, bankable products can significantly reduce administrative and operational costs. These savings can enhance net returns for investors and make alternative investments more attractive to a broader audience.

3. Transparency and Simplicity

Bankable products offer greater transparency and streamlined performance reporting. This transparency simplifies the due diligence process and allows investors to make more informed decisions based on readily available data.

4. Scalability and Accessibility

The streamlined nature of bankable products makes them more scalable and accessible to a wider range of investors. Through collaboration with International Central Securities Depositories (ICSDs), global banks, and paying agents, financial institutions can easily integrate these products into their offerings, broadening the reach of alternative investments to Accredited Investors and smaller institutions that were previously excluded.

5. Regulatory Compliance

Bankable products are structured to comply with regulatory standards from the outset, simplifying the compliance process. This ease of compliance facilitates cross-border investments and enhances the global distribution potential of alternative investment products.

The Opportunity with Bankable Products

Broadening Access to Alternative Investments

Bankable products democratize access to alternative investments in the same way public markets have for traditional assets. By standardizing alternative investments and integrating them into banking and brokerage systems, a broader range of investors can discover, access, and monitor these opportunities more easily.

Discoverability

Bankable products enhance the discoverability of alternative investments. Investors can access a centralized database of investment opportunities, much like they do with stocks and bonds on public exchanges. This centralized access reduces the time and effort needed to identify suitable investment options.

Accessibility

The ease of transaction through familiar banking and brokerage accounts lowers the barriers to entry for investors. Unlike feeder funds, which often have high minimum investment requirements and complex subscription processes, bankable products offer a more straightforward investment path. This accessibility opens up alternative investments to retail investors and smaller institutions, expanding the investor base.

Monitoring and Transparency

Bankable products provide a level of transparency and streamlined performance reporting similar to public market investments. Investors can track performance, receive regular updates, and access detailed reports through their bank or brokerage accounts. This transparency builds trust and allows for more effective portfolio management.

Operational Efficiency

For investment managers, bankable products streamline operations by reducing administrative burdens and compliance complexities. The standardized nature of these products simplifies reporting, auditing, and regulatory compliance. This operational efficiency allows managers to focus more on investment strategy and less on administrative tasks.

Global Distribution Potential

Bankable products facilitate global distribution through collaboration with ICSDs, global banks, and paying agents. This global reach enables investment managers to tap into a wider pool of investors and scale their offerings across borders more efficiently than traditional feeder funds.

Conclusion

The alternative investment industry is undergoing a significant transformation. The traditional feeder fund model, with its inherent complexities, costs, and liquidity constraints, is increasingly seen as outdated. In contrast, bankable products offer a modern solution that aligns with the evolving needs of investors and the broader financial ecosystem.

Bankable products provide enhanced liquidity, cost efficiency, transparency, scalability, and regulatory compliance, making them the future of alternative investments. They democratize access to alternative investments, allowing a broader range of investors to discover, access, and monitor these opportunities with ease. As the industry continues to innovate and adapt, the adoption of bankable products is set to accelerate, providing investors with more accessible, efficient, and attractive investment opportunities.

For firms looking to seize this opportunity, embracing bankable products can unlock new growth avenues and meet the changing demands of their investor base. FundFront specializes in structuring these bankable products, ensuring seamless integration and distribution, and positioning your firm at the forefront of the alternative investment industry. Contact FundFront today to learn how we can support your journey into the future of alternative investments.

Written by:

Arman Salavitabar

Arman Salavitabar

Founding Partner, FundFront

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