Venture Capital, Private Equity, and Hedge Funds – Don’t hesitate to rate!

Occupation is the gateway to a lot of wealth accumulation and the finance industry is no exception.

It’s not just about high salaries. It’s about building a full wealth picture that includes lots of assets. Because while some people can give big gifts from disposable income, your really big gifts are going to come at least partially from your prospect’s assets.

In the finance industry, especially alternative investment funds – such as hedge funds, private equity funds, and venture capital funds – it can usher in billionaire status, as it did for 93 people on the Forbes Real-Time Billionaires List.

Alternative investment funds are like mutual funds for the super-rich. The minimum investment amount is often quite high, such as $1M+, and the investor money is pooled into one fund, which then uses that pot of money to make high risk investments that are chasing high rates of return.

How high is the rate of return? Consider the interest rate on a savings account. These days, you might find a bank that will offer you 4%, but the past few years have seen savings account interest rates at below 1%. It’s no wonder that those with excess money are patient enough to chase returns of 10%, 30%, or more!

I say patient, because alternative investment fund investors might have their money tied up for 3, 5, or even up to 10 years. Fund owners typically have some of their own money patiently invested in the fund, too.

An alternative investment fund owner is earning money in these ways:

• Asset Management Fee: The firm typically charges around 1% for all assets under management (AUM). These fees pay salaries and other operating expenses.
• Performance Fee: Typically around 15%, this is how much the firm receives on the investment return and is also called “carried interest.” If $100M AUM earns 30% ($100 x .30 = $30M), then the performance fee is 15% of $30M, or $4.5M.
• Firm Investment: It’s pretty common that part of the total AUM includes some of the firm’s own money. In that case, the firm would receive the full return on those invested dollars, not a performance fee. In addition, the firm would not charge itself an asset management fee on its own investment.
• Reduced Firm Expenses: The limited partnership agreement that governs the fund outlines what expenses the fund will pay the firm. Also, depending upon the type of investment strategies, other fees and obligations — such as loans — might be the responsibility of the company the fund invests in and not the firm. While not something we researchers might calculate, lowered expenses impact how much money goes into the firm’s pockets.

How can you identify prospects in alternative investment firms?

Maybe your prospect didn’t make the Forbes or Bloomberg billionaire lists, but that doesn’t necessarily mean the person isn’t a great prospect. Wealth at this level can be very private. And even if your prospect is “only” in the $100M to $1B estimated net worth category – that’s still amazing, right?

Your best bet is to make it a practice to recognize, understand, and present occupation well – including the financial field. Thankfully, there are plenty of tools and resources to help you do that.

Tools like iwave often provide the first clue you are researching someone with wealth earned in finance.

• Many times, it is ZoomInfo or Dun and Bradstreet that provides the first clue about the name of your prospect’s employer. From there you can quickly find the company website, search Google, or find a LinkedIn profile.
• Warren Buffet might live modestly, but many with wealth earned from alternative investment careers pop with high value real estate and large philanthropic giving, just like other high net worth individuals.

You might not know if your prospect is an investor in alternative investment funds, but the owners of the firms operating the funds are publicly named in US Securities and Exchange Commission (SEC) filings. Even if your fund owner is outside of the US, it might be worth checking the SEC filings because there are regulations about US investors that can trigger US filing requirements.

• Search for an individual or firm on the Investment Adviser Public Disclosure (IAPD) site: https://adviserinfo.sec.gov
• Find the Form ADV and look at Schedules A and B for ownership.
• Many firms operate several investment funds. Form ADV, Section 7.B.(1) Private Fund Reporting, provides you with details on each fund.
• If the person or firm is required to file a Brochure, you can find details about AUM and the fee structure.

Be worried about underestimating wealth!

It can feel uncomfortable to speculate about wealth, especially when you can’t calculate specific, hard asset numbers to back you up, but it is worth it. Josh Kushner (brother to Jared Kushner, whose father-in-law is Donald Trump) checks in on the Forbes Real-Time Billionaires List at $3.6B at age 37 years old!

You wouldn’t want to be the one who under-estimated him early on, even though he was in the venture capital space, would you?

And it is also true that even when you find out your prospect is a high earning owner, you still need the person to have affinity and propensity to give. Thankfully, iwave can give you affinity and propensity ratings, and of course you can search for giving, family foundations, and nonprofit board positions on iwave, too.

I know you have great major gift prospects in your donor database, you just need to get curious and follow the occupational clues!

Additional Resources for Learning

Wall Street Mojo is a free educational source, although not focused on our purposes of rating for capacity.
Prospect Research Institute offers Master Classes on the finance field that walk you through the calculations.
Understanding the Financial World for Prospect Researchers with Jon Jeffery is a 90 min on-demand training from PyroTalks CIC.

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