Don't invest unless you're prepared to lose all the money you invest. This is a high-risk investment and you are unlikely to be protected if something goes wrong.
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Risk Summary

Estimated reading time: 2 min

Due to the potential for losses, the Financial Conduct Authority (FCA) considers this investment to be high risk.

What are the key risks?

  • You could lose all the money you invest
  • Most investments are shares in start-up businesses or bonds issued by them. Investors in these shares or bonds often lose 100% of the money they invested, as most start-up businesses fail.
  • Checks on the businesses you are investing in, such as how well they are expected to perform, may not have been carried out by the platform you are investing through. You should do your own research before investing.

You won't get your money back quickly

  • Even if the business you invest in is successful, it will likely take several years to get your money back.
  • The most likely way to get your money back is if the business is bought by another business or lists its shares on an exchange such as the London Stock Exchange. These events are not common.
  • Start-up businesses very rarely pay you back through dividends. You should not expect to get your money back this way.
  • Some platforms may give you the opportunity to sell your investment early through a 'secondary market' or 'bulletin board', but there is no guarantee you will find a buyer at the price you are willing to sell.

Don't put all your eggs in one basket

  • Putting all your money into a single business or type of investment for example, is risky. Spreading your money across different investments makes you less dependent on any one to do well. A good rule of thumb is not to invest more than 10% of your money in high-risk investments. Learn more here.

The value of your investment can be reduced

  • If your investment is shares, the percentage of the business that you own will decrease if the business issues more shares. This could mean that the value of your investment reduces, depending on how much the business grows. Most start-up businesses issue multiple rounds of shares.
  • These new shares could have additional rights that your shares don't have, such as the right to receive a fixed dividend, which could further reduce your chances of getting a return on your investment.

You are unlikely to be protected if something goes wrong

  • Protection from the Financial Services Compensation Scheme (FSCS), in relation to claims against failed regulated firms, does not cover poor investment performance. Try the FSCS investment protection checker.
  • Protection from the Financial Ombudsman Service (FOS) does not cover poor investment performance. If you have a complaint against an FCA-regulated platform, FOS may be able to consider it. Learn more about FOS protection here.

If you are interested in learning more about how to protect yourself, visit the FCA's website here.

For further information about investment-based crowdfunding, visit the crowdfunding section of the FCA's website here.
Alternative Investment Due Diligence Checklist
Insights
Alternative Investments
Portfolio Diversification
Alyssa Peterson
· 2 min read
· Updated on

Essential Checklist for Alternative Investments Due Diligence

Discover the essential checklist for conducting due diligence on alternative investments to make informed investment decisions.

Understanding Alternative Investments

Alternative investments refer to investment options other than traditional stocks, bonds, and cash. These can include private equity, venture capital, hedge funds, real estate, commodities, and more. It is important for experienced investors to have a solid understanding of alternative investments before conducting due diligence.

One key aspect to understand is that alternative investments often have different risk and return profiles compared to traditional investments. They may also have longer lock-up periods and limited liquidity. Additionally, alternative investments are typically subject to less regulation and oversight, requiring investors to be more proactive in conducting due diligence.

 

Key Due Diligence Considerations

When conducting due diligence on alternative investments, there are several key considerations to keep in mind:

  • Investment Strategy: Understand the investment strategy of the alternative investment. Is it aligned with your investment goals and risk tolerance?
  • Track Record: Evaluate the track record of the investment manager or firm. Have they demonstrated consistent performance and expertise in the specific alternative investment?
  • Fees and Expenses: Assess the fees and expenses associated with the alternative investment. Are they reasonable and transparent?
  • Investment Structure: Examine the investment structure and terms. Is it fair and beneficial to investors?
  • Valuation: Understand how the alternative investment is valued. Are the valuation methods robust and transparent?
  • Legal and Regulatory Compliance: Ensure that the alternative investment complies with relevant laws and regulations. Are there any potential legal or regulatory risks?
  • Risk Management: Evaluate the risk management practices of the investment manager or firm. How do they identify and mitigate risks?
  • Exit Strategy: Assess the exit strategy for the alternative investment. Is there a clear plan for exiting the investment and realizing returns?

 

Creating a Due Diligence Checklist

To conduct due diligence effectively, it is helpful to create a checklist that covers all the necessary aspects. Some items to include in the checklist are:

  • Investment strategy and alignment with goals
  • Track record and performance
  • Fees and expenses
  • Investment structure and terms
  • Valuation methods
  • Legal and regulatory compliance
  • Risk management practices
  • Exit strategy

By having a checklist, investors can ensure that they cover all the important areas and avoid overlooking critical factors during the due diligence process.

 

Analysing Risk Factors

Alternative investments come with their own set of risk factors that need careful analysis during due diligence. Some common risk factors to assess include:

  • Market Risk: Evaluate the potential impact of market fluctuations on the alternative investment.
  • Liquidity Risk: Consider the ease of buying or selling the investment and the potential for limited liquidity.
  • Operational Risk: Assess the operational capabilities and risk management practices of the investment manager or firm.
  • Legal and Regulatory Risk: Evaluate the legal and regulatory environment surrounding the alternative investment.
  • Counterparty Risk: Analyse the risk of default or failure by other parties involved in the investment.
  • Concentration Risk: Consider the level of concentration in the investment portfolio and the potential impact on returns.

By thoroughly analysing these risk factors, investors can make informed decisions and mitigate potential risks associated with alternative investments.

 

Finalising Investment Decision

After conducting thorough due diligence, it is time to make the final investment decision. Consider the following points:

  • Risk-Return Tradeoff: Assess the potential returns in relation to the risks involved. Does the investment align with your risk tolerance and return expectations?
  • Diversification: Evaluate how the alternative investment fits into your overall investment portfolio. Does it provide diversification benefits?
  • Exit Strategy: Review the proposed exit strategy and evaluate its feasibility.
  • Professional Advice: Seek input and guidance from financial advisors or experts specialising in alternative investments.

By considering these factors, investors can make a well-informed decision and confidently proceed with their alternative investment.
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