Why VC Funds Make Sense for RIAs: Q&A with Seedbrite’s Josh Fagan
In the face of increasing competition, shifting investor preferences, and market volatility, registered investment advisors (RIAs) are continually seeking innovative strategies to provide clients with a competitive edge.
Incorporating venture capital (VC) investments represents a promising avenue for RIAs to transform client offerings and outcomes. It offers a blend of differentiation, diversification, potentially high returns, and access to emerging technologies, which can all significantly enhance client portfolios.
Josh Fagan, CEO of Seedbrite Ventures, addressed the growing attraction to VC investments by wealth managers, what stage of the investment lifecycle RIAs are most interested in deploying cash, and the benefits of using the company’s Seedcraft platform, among other topics.
What exactly makes VC an attractive investment for RIAs?
The RIA space is evolving quickly. VC has been capturing the attention of RIAs because their clients are doing their own research online. Below are a few examples of why RIAs and their clients are attracted to VC.
● Diversification: VC provides diversification beyond traditional assets.
● Tax Advantages: 1202 QSBS capital gains tax elimination.
● Access to Innovation: Exposure to innovative technologies.
● Long-Term Horizon: VC investments span 5-10 years or more.
● Private Market Exposure: Complements public market investments.
● Differentiator: Offering VC to clients can be a new client attraction tool.
Describe the benefits of using the Seedcraft platform, particularly given the capital gains tax advantages to investors?
Seedcraft allows RIAs and their clients to invest directly into portfolio companies alongside multiple venture managers. This provides two direct benefits.
1. The 1202 QSBS tax benefits to pass through to their clients. With the 1202 QSBS, if the investment is held for at least five years, investors can potentially walk out tax free up to $10 million in capital gains taxes or 10X the original basis.
2. With our team of experienced and highly qualified VC investors, RIAs now have access to the same VC deals as seasoned investors in Silicon Valley. Our strategic partner, Coolwater Capital, has worked with over 240 emerging venture capital managers whose funds have raised more than $2 billion dollars.
Are the portfolios you offer customizable and at what stage of the investment lifecycle are RIAs typically interested in?
Seedbrite offers RIA private label portfolios, so RIAs are able to work with our investment team to tailor their bespoke funds to align with their philosophies and the needs of their clients. They include specific sectors like artificial intelligence, healthtech or software, etc. and RIAs can exclude sectors that might not align with their investment strategy. Seedbrite also offers turnkey funds for RIAs that need more guidance.
Are RIAs gravitating toward smaller funds, or following wealth advisors and private banks into more blue-chip VC funds?
RIAs are gravitating towards early-stage companies to get in on the ground floor, so there is more potential upside. With an early-stage diversified portfolio approach, there is a higher probability of investing in the next unicorn company. In addition, they get to take advantage of the 1202 QSBS tax benefits.
What’s the differentiator between investing in funds-of-funds and venture firms?
Investing in fund-of-funds does not allow you to be as granular when it comes to selecting the investment sector and portfolio companies. With fund-of-funds you are limited to a set amount of sectors and deal flow. Also, the 1202 QSBS tax benefits do not pass through to the investors with a fund-of-funds structure. RIAs are very particular, and they need that investment granularity to fulfill the fiduciary duty to their clients.
