Wednesday, May 23, 2018

Event: Commonfund Institute June 25-29, 2018

TSW Community,

If you're interested in learning more about sovereign wealth and portfolio management, a good educational event is the upcoming Commonfund Institute which will be held June 25-29, 2018 at the Yale School of Management in New Haven, CT.

The Institute is geared towards sophisticated investors representing endowments and foundations, pension funds, healthcare systems, charities and other investors. Its an intensive, five day series of classes, lectures from leading practitioners and case studies.

For 2018, the focus is on "Exploring Leading Edge Theory and Practice", with topics including (as of posting):

  • The Evolution of the Endowment Model of Investing
  • The Art and Science of Strategic Asset Allocation: Optimizing for Drawdown Risk and Recovery
  • The Eco-System of Nonprofits: Financial & Operational Metrics that Influence Asset Allocation
  • Insights on Spending Policy: Assessing the Right Approach
  • Best Practices on Development and Fund Raising for Non-Profits
  • Understanding the True Costs of Portfolio Management
  • Governance Best Practices: Does Your Board Measure Up
  • Designing a Sound Investment Policy Statement
  • The Role of Diversity in High Performance Boards
  • The Psychology of Tail Events
  • Governance Case Study
  • Principles of Effective Portfolio Construction
  • Risk Management in Investment Policy: Measures and Management
  • Applying the Quantitative Tools of Portfolio Management
  • Building a Global Equity Portfolio: Alpha, Factors and Beta
  • Optimizing Duration and Credit in Fixed Income Portfolios
  • The Evolution of the Private Capital Investment Environment
  • Private Capital Case Study Review
  • What it Means to be a Responsible Asset Owner (and Why it Matters as a Fiduciary)
  • The Economics of Sustainability
  • ESG Case Study
Commonfund was founded in 1971 as an independent nonprofit asset management firm with a grant from the Ford Foundation. Commonfund today manages customized investment programs for endowments, foundations and public pension funds.

I will be attending the Institute in June. Please let me know if your tribe, ANC or NHO is planning to attend and we can touch base while we're all in CT. The event is invitation only, but if you're interested in attending on behalf of your group please drop me a line and I can likely get you a seat or two (assuming there is space available).

Know of any other events the community should know about? Send them my way!

In Perpetuity.

Want to Make Private Market Investments? Make Sure Your TSWF is an Accredited or Qualified Investor!

TSW Community:

If your Tribal Sovereign Wealth Fund (TSWF) has hopes to make private market investments, especially with organized funds, your TSWF will need to be seen as an accredited investor and - in some instances - as a "super-accredited" investor.  In many cases, you will be able to self-certify your TSWF as a qualified investor, but you'll likely need to sign representations you are qualified in the subscription agreement and investor questionnaire. This varies from manager to manager - some will ask, some won't. The bigger and more "institutional quality" the fund, the more likely they'll ask.

If private market investments are part of your strategy (assuming you have a growth objective - as discussed here), I'd suggest making sure you meet these qualifications BEFORE you start looking at opportunities and spending money on diligence / document reviews.

First off, you'll need a legal entity from which to invest. Also, under the current policy, you cannot qualify as a sub-unit of a tribal government as there are no qualified investor definitions for tribes (or any government body, for that matter). To make it simple, legal entity options could include LLCs, C-Corporations or Section 17 Federal Corporations.

A good summary on the various accreditation levels can be found around the web, and I particularly liked the overview presented by the Strictly Business Law Blog here, so I'm going to paraphrase some of it below.

Let's go over a few of the "levels" of accreditation you may be faced with when trying to make a commitment to a private fund (or limited partnership):

Level 1: Accredited Investor

If you're considering an investment in a fund (limited partnership or LLC), the investment will be considered a security by the Securities and Exchange Commission (SEC). In many cases, the fund manager will look to exempt the security from registration (and make his/her life easier) by issuing the security as a "Reg D" offering (Securities Act of 1933, Regulation D, Rule 506(b)).

In order to do this, the fund manager must limit the offering to Accredited Investors. In other words, he/she can't just advertise the investment opportunity to anyone - they must have a minimum level of income or wealth (as a proxy for investment savvy and risk tolerance).

Rule 501 defines who is an accredited investor - including qualifiers for individuals and entities. For purposes of this discussion, we'll focus on the entity qualifier most TSWFs will want to use. Your TSWF will be considered "accredited" if:

  1. it is not formed for the specific purpose of acquiring the interest in the fund (i.e., it has or intends to make other investments) AND 
  2. has total assets in excess of $5M.

So what does this mean? Basically, it means you'll need to contribute at least $5M to your TSWF entity before you're going to be able to qualify for most private market investments, and your commitment to any single investment will need to be less than your total fund size (obviously, because you're diversifying, right?).

Level 2: Qualified Client

Fund managers typically get paid in two ways: (1) management fees and (2) performance fees. The management fee is based on a small percentage (generally 1-3% per year, depending on the fund type) of  your capital commitment or the total invested assets, and typically goes down over the life of the fund once the investments have been made. For example if you commit $100 and the management fee is 2%, then the manager collects $2/year for the management of your assets. The performance fee (normally referred to as carried interest) is manager compensation realized on the profits of the fund, and is based on a percentage (generally 10-30%, depending on the fund type) of capital realization. In other words, if you invest $100 in a fund with a 20% carried interest and the fund value appreciates to $300, then the manager is entitled to 20% x $200 = $40.

In certain cases, particularly if the fund manager is registered with the SEC and/or located in particular states, they aren't allowed to collect performance fees from an investor unless the investor is a Qualified Client. Per the Investment Advisors Act of 1940, Rule 205-3, your TSWF will be considered qualified if you meet any of the following criteria:

  1. it invests more than $1M in the fund OR
  2. it has a net worth of more than $2.1M prior to the investment OR
  3. it meets the criteria of a Qualified Purchaser (see below).

So what does this mean? Basically, your TSFW could be an Accredited Investor but if the manager meets certain criteria, the manager may not want your TSFW as an investor in his/her fund if your TSFW doesn't meet the qualified client criteria. After all, he/she won't be able to get paid on performance, which is often the biggest component of their compensation.

Level 3: Qualified Purchaser

Just like the Securities Act of 1933 allows for a securities registration exemption if all investors are Accredited Investors, the Investment Company Act of 1940 allows for investment company registration exemption if it has less than 100 investors and isn't making a public offering of securities.  Most smaller funds leave it at that.

However, certain funds expect more than 100 investors and/or have legal counsel who are a bit more conservative in nature. Typically, these are funds catering to larger, institutional investors. These funds use a separate section of the Investment Company Act of 1940 to authorize their exemption, but it requires all investors to be Qualified Purchasers. Your TSWF will be considered a qualified purchaser if:
  1. it is not formed for the specific purpose of acquiring the interest in the fund (i.e., it has other investments) AND 
  2. has total assets in excess of $25M.
So what does this mean? Basically, its the same thing as qualifying as an Accredited Investor, but the asset threshold is quite a bit higher - five times higher, to be exact. It also means that if your TSWF is capitalized in phases (like an annual capital contribution), you need to be aware of the timing and the requirements put further by the particular fund in which you'd like to invest. If the fund requires qualified purchasers and your TSWF is sitting at $20M in investable assets, you'll likely be out of luck unless they make an exception (which they may be able to do, by the way). A better approach would be to have this discussion at the outset and start with a $25M initial capital contribution.

Bottom line. If you want access to certain funds, you'll need to start out with a decent amount of investment capital either deposited or committed (w/ a binding contract from the tribe) to the TSWF.

In Perpetuity,


  • I'm not a lawyer and this is not legal advice. If you're considering a private market investment in an unregistered security, I'd suggest you have a qualified attorney take a look at the documents. Need some suggestions, give me a shout.
  • On performance fees like carried interest, I ignored hurdle rates, clawbacks, etc to simply the examples. Talk to someone who knows the various terms before you agree to any fee structure.

Wednesday, May 9, 2018

Sovereign Finance Annual Economic Development & Investment Conference

TSW Community,

This week I'm at Sovereign Finance's Annual Economic Development & Investment Conference at Talking Stick Resort (Salt River Pima-Maricopa Indian Community) in Scottsdale, AZ. If you're new to investing or want an overview of what's involved, this would be a pretty good conference to attend.

Important Note: Sovereign Finance is an investment advisor, so they would obviously like to have your business in addition to hosting pure-play "education" focused event. I haven't worked with them in a professional setting (no endorsement implied) - but they seem like good folks and they're 100% native (individual) owned.

On the agenda are two tracks:

(1) "Economic Development" (i.e., Direct Investing in Private Companies)
(2) "Investments" (i.e., Overall Investment Portfolio Management & Manager Selection)

In the Economic Development session, they are discussing the processes and approaches to direct investing in private companies. Basically, venture capital (investing in pre-revenue and/or pre-profit startups) and buyouts (taking control ownership of profitable, private companies). Guest speakers include two tribal groups - one focused on real estate investments (primarily hotels).

In the Investments session, they are focused on the management of a diversified, long-term portfolio of investments - including stocks, bonds and other private investments (mostly through external managers). Speakers included Carmel Wellso, Director of Research for Janus Henderson, who gave an in-depth market overview. I especially liked how the Sovereign folks started with a talk about risk and gave good structured examples of how to frame the investment discussion.

In Perpetuity.