Why Leading VCs are Becoming Registered Investment Advisors
Investors from the largest VCs in the world to every day retail traders continue to emphasize the value of portfolio diversification and investment flexibility. One increasingly popular trend which provides investment managers added flexibility in their offerings is transitioning to a Registered Investment Advisor (“RIA”).
What is an RIA
RIAs are a designation which allows a money manager, or in our application a VC/CVC, the ability to pursue alternative investments in excess of the 20% limitation set in place by the SEC. In a typical VC/CVC investment portfolio, current government oversight requires 80% of investments to be direct to private companies. An RIA model provides VC funds with an elevated level of investment freedom – allowing them to invest in alternative assets like cryptos, secondaries, public equities, and even other venture funds beyond the current limitations.
RIAs are only really necessary when a fund expands past $150 million in assets under management (“AUM”) (between $100M and $150M in AUM, VCs can register as exempt reporting advisers, or ERAs). RIAs provide larger investment groups with the investment flexibility that the more broadly-focused strategies require (allow the use of cryptos, public equities, and other venture funds on a larger scale than the previous 20% limit).
With this change in investment strategy comes additional regulatory requirements. RIA’s are required to act as fiduciaries, meaning they are legally obligated to act in the best interest of the clients. If a fund holds more than $150M in AUM, they are bound by the regulatory oversight of the SEC and state legislations.
RIA’s in the Real World
RIAs come in all shapes and sizes ranging from local money managers to Andreessen Horowitz (a16z). a16z transitioned their business model from a classic VC to an RIA in March of 2019 as they continue to double down on crypto-related investments.
This trend really began on a large scale with Touchdown Ventures in 2014. This unique VC partners with leading corporate venture arms (corporate VCs or CVCs) to provide these teams with the financial knowledge they require, and Touchdown has had a growing penchant for construction and property companies as these nascent technologies finally get adopted.
Many VCs, including a16z who has raised $7.6B across four crypto funds (fourth fund announced Q2 2022), saw both public and most private markets take off in 2020 and wanted to put more than the 20% threshold into these markets.
Since 2016, RIA’s have seen 12% annual growth in AUM, according to Mckinsey research. A major driver of this growth can be attributed to investment bank’s elevated M&A activity of acquiring established RIAs to bolster their wealth management businesses and produce additional revenue streams through the attractive fee-based structure of RIAs, which make it a relatively high-margin investment tool.
Current State of RIA’s
The flood of companies transitioning to the RIA business model has slowed down as of late according to Pitchbook. Hesitancy to rework investment models can likely be attributed to negative sentiment in the public markets as economic outlooks remain dark. Not only is it expensive to become an RIA fund, but VCs have portfolio companies to worry about and the broader public and crypto markets have seen significantly increased volatility in the trailing 12 months. VCs are stalling on this transition and looking in house at their portfolio companies as they continue to seek calmer waters in the future.
Though the RIA movement is on hold for now, it still remains an intriguing, and potentially lucrative, trend to follow as the markets correct and VCs find yet another way to stay ahead of the innovative and financial curve. As the world of cryptocurrency continues to gain steam and investors continue to seek broader portfolios, the transition to an RIA may prove to be a significant trend in the built environment.