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The DI Wire Q&A with Tony Chereso, President and CEO of the Institute for Portfolio Alternatives

The DI Wire had a chance to speak with Tony Chereso, president and chief executive officer of the Institute for Portfolio Alternatives, a trade group representing the non-traded direct investment industry.

The DI Wire had a chance to speak with Tony Chereso, president and chief executive officer of the Institute for Portfolio Alternatives, a trade group representing the non-traded direct investment industry, to discuss how alternative investments are faring during the COVID-19 pandemic, the importance of marketplace transparency, and the SEC’s proposed rule to modernize fund valuation practices.

In the current market environment, how is the alternative investments industry explaining the role of illiquid investments in portfolios to investors?

We fundamentally believe alternative investments should be considered a key part of a well-diversified portfolio focused on long-term growth and returns.

Many investors value alternative investments because of their potential for returns outside of traditional equity and bond markets. It’s also important to note many alternative investments are in stronger positions to withstand the COVID-19 market and economic shock thanks to the purposeful evolutions in both product structure and transparency since the global financial crisis.

We continue to see calls for transparency in the marketplace. Why is it important for there to be continued evolution in the industry and what additional steps can be taken?

Uniformity, consistency and transparency in valuation techniques are essential to the evolution and growth of the alternative investment marketplace.

Valuations are designed to provide investors with confidence in their investment, which means it’s critical to provide transparency into the valuation process as well as increased visibility into underlying assets. Particularly in times of uncertainly, like we are currently in, transparency is essential for investors.

Our industry must continue to engage not only with advisers and the investing public, but also with each other to keep moving forward. As the SEC moves to modernize the exempt offering framework and valuation practices, it’s imperative the industry is coordinated in our efforts promoting best practices and that we hold ourselves accountable as we implement and adapt to new and better standards for investor protections and capital access.

The Securities and Exchange Commission is proposing a rule to modernize fund valuation practices. What input would the IPA offer to the SEC?

The Institute for Portfolio Alternatives appreciates the Commission’s ongoing efforts to improve the consistency and transparency of the valuations process.

The SEC’s proposal is a favorable, good first step in providing clarity regarding a board of directors’ responsibilities related to valuation processes. Broadly speaking, the IPA encourages the SEC to endorse specific guidance as a way to achieve a flexible but standard methodology of determining fair value, and clarity around the role a fund’s adviser plays in determining that fair value.

What else should the SEC consider in terms of a valuation standard for the industry?

While the current proposal is a good first step in modernizing and solidifying valuation practices, the IPA has urged the SEC to provide further clarity around certain reporting requirements of an investment adviser if a fund’s board chooses to delegate the valuation responsibility. As it stands, the proposal is overly prescriptive in certain reporting requirements while at the same time lacking specific guidance and methodologies.

Overall, this could incur significant costs without providing a clear benefit to the investing public, a fund’s board or the investment adviser. Further, this could have the unintended consequence of creating confusion and failure to adopt a universal valuation standard.

The COVID-19 pandemic has upended markets across the globe. How are alternative investments weathering the storm? How is value holding up in the space?

At times of heightened uncertainty, volatility can be expected across a wide variety of asset classes and fund types. Volatility seen in the alternative investment industry is not unique.

As the full severity of the COVID-19 crisis is still unknown, and the long-term economic impact not yet fully realized, the complete impact across alternative markets is difficult to conclusively assess.

It would be remiss not to acknowledge the fact that value has been impacted across the board. However, alternative asset classes have an opportunity to come out of this crisis with some good narratives due to ongoing industry evolution and long-term returns.

How would you characterize the industry’s response to COVID-19 compared to past periods of uncertainty in financial markets?

The industry has been continuously evolving since the global financial crisis, and there has been tremendous progress in recent years as new institutional players and legacy firms have brought new products and strategies to the market better fit for the retail customer and sophisticated investor alike.

It’s important to reiterate that volatility in any asset class can be expected and is not unique, even in times of high growth and prosperity. It’s also important to remember that volatility in markets throughout most of 2020 isn’t the result of weak underlying fundamentals, and instead the product of an unpredictable virus sweeping the globe.

I personally believe that our industry was on a stronger-than-ever footing as we entered 2020, and that those fundamentals will help the industry rebound faster than most as we look to a recovery in the near future.

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