For investors interested in investing in securities market it is necessary to utilize proper investment due diligence and proper analysis of the product before finally moving ahead with their investment plans. The simple and most fundamental rule is to skip investment opportunities in which analysis of income stream is difficult. Our aim here will be to check important aspects that every investor should look into at the time of making a selection of exempt products to purchase.
Some of the things we will be going through in the following sections would consist of checking what is known as arms length transaction, what is meant by the hold period, fee escalation, acquisition fees and performance incentives. The knowledge of these details will help you in choosing a product which best meets your investment needs.
Before making any investment it is necessary for you to ensure that the product has a hold period and it is easy to understand it. Moreover, it should not be possible for the issuer to change or extend it after you purchase the exempt product.
There should also be clear details available about the time period for which investment is to be committed.
Arms Length Transactions
It is better not to invest in non-arms length products since in such products target assets are made available to the management team. This type of strategy often results in a clash between management's and investor's investors and need to be avoided.
This refers to payment being given to management team as a certain percentage out of deployed capital. As such acquisition fees is not linked with returns investor gets, it is better to ignore exempt products which have such acquisition fees.
At the time of performing investment due diligence you need to check that fees for management team is not connected with appraised value of assets. The reason is that such asset value is regarded as an unrealized gain. In ideal scenario the fees paid to management should be from profits achieved on exempt products for investors.
Incentives and Performance
It is better for investors to invest in products in which company as well as its management team earns its rewards out of returns investors get and is known as success based fees. Thus, you need to look for products where such success based fees is utilized.
As such it will be better to avoid investing in exempt products where you find terms such as acquisition fees or management fees since these are not based on success achieved for investors and will not be able to provide you best returns.
As we can see exempt market can be quite complex for beginners and it is important to utilize investment due diligence to select right products which will be able to provide you best returns.