How SDIRAs Can Transform Your Capital Raise
Virtually every fund sponsor knows the challenge of competing for the same pool of capital. Usually, you're pitching the same angel investors, chasing the same VCs and fighting over the same high-net-worth investors as others in your space. Meanwhile, there is $45.8 trillion in U.S. retirement assets, including nearly $18 trillion in IRAs, according to the Investment Company Institute (ICI),2 largely overlooked by fund sponsors and issuers.
In particular, self-directed IRAs (SDIRAs) can transform your capital raising process. Instead of perpetually competing in an overcrowded market, you can tap into a massive pool of capital that's specifically designed for long-term growth and comes with built-in tax incentives that could make investors more willing to commit to your fund or startup.
What is a self-directed IRA?
A self-directed IRA is a type of individual retirement account (IRA) that tends to offer more flexibility and control over what the account holder may invest in, compared to regular IRAs. Typically, IRAs only let you invest in publicly traded assets like stocks, bonds, and mutual funds. In contrast, an SDIRA also allows for alternative investing across a broad range of assets, such as:
Although these accounts tend to provide more flexibility in terms of what assets can be invested in, SDIRAs are subject to the same IRS rules as traditional IRAs, to retain the tax advantages that are typical of retirement accounts. Plus, certain types of investments within SDIRAs, like private placements, still need to follow securities law, which requires investors to be accredited.
Benefits of using SDIRAs for your capital raise
Fundraising via SDIRAs offers several advantages for both investors and fund sponsors/issues. Some of the top benefits include:
1. Access to untapped capital pools
Most fundraising strategies target the same limited sources, such as institutional investors, family offices, and high-net-worth individuals with liquid assets. These groups get pitched constantly, which makes them selective and hard to win over.
However, SDIRA investors represent a largely untapped market of retirement investors. Granted, there might be some crossover, such as high-net-worth investors who invest inside and outside of retirement accounts, but in general, SDIRAs provide a new source of funding to access.
So, positioning your fund or company to accept SDIRA capital can expand your potential investor base and access deep pools of capital.
2. Long-term capital alignment
While funding sources like venture capital and angel investing are not exactly short-term investors in the same way some public stock investors are, these fundraising sources often want to see exits within a few years of investing. Even private equity investors are unlikely to hold investments for more than a decade. On the other hand, SDIRA investors often operate on much longer-term time horizon, considering that they're investing for retirement.
That long-term approach can be great for both investors and those raising capital. If you're fundraising, you can potentially rely on more patient, stable capital, while investors benefit from being able to allocate their investments to companies that have significant long-term potential.
3. Tax advantages
By investing within SDIRAs, investors can access tax advantages that help them potentially allocate more capital than they would otherwise and keep it invested for longer. Like other IRAs, a SDIRA can involve tax-deductible contributions with a traditional SDIRA, and there are also Roth SDIRAs that provide the potential for tax-free growth and withdrawals.
4. Streamlined due diligence process
While there are still due diligence and compliance requirements associated with SDIRA investors, the process is typically more streamlined than it would be if doing large capital raises from institutional investors. Instead of complex deal terms, such as VC equity stakes that include things like advisory shares and voting rights, raising capital from SDIRA investors is often more similar to raising capital for publicly traded stocks, with investors taking relatively small, straightforward equity stakes.
That said, there still can be nuances, like confirming if an investor is accredited for some private placement fundraising. In addition, due to the complexity of the assets involved, the process for investing in alternative assets through SDIRAs is generally more involved than investing in a traditional IRA.
5. Repeat investment opportunities
Another potential advantage of SDIRA capital raises is the opportunity for repeat investments. Because these investors are allocating to these accounts for retirement, they might keep putting money in on a regular basis. As such, they might decide to invest in your fund or company on a repeat basis using their SDIRA.
How Forge Trust can help
As these examples show, raising capital through self-directed IRAs can provide a wide range of benefits. And partnering with a qualified custodian that has the necessary administrative infrastructure and experience working with sponsors and investors can potentially make the process easier to navigate.
Ultimately, your investors choose where they open an SDIRA, but you can streamline the capital raising process by letting them know that you are working with qualified custodians like Forge Trust. With over 40 years of experience in providing custody and administrative services, Forge Trust understands the operational complexities of alternative investing and can simplify SDIRA usage for your investors.
If you’d like to learn more about how SDIRAs can transform your capital raise, please visit Forge Trust’s Resources page, and if you’d like to get started with a SDIRA, open an account today.
Frequently asked questions about how SDIRAs can transform your capital raise
How much capital can I realistically raise through SDIRAs?
It depends on your investment minimums and investor network, but individual SDIRA investors often have substantial account balances. Many have six-figure retirement accounts, and some have much more. So, depending on your ability to raise capital from individuals, fund sponsors can potentially raise hundreds of thousands of dollars if not millions by pooling investments from a collective group of SDIRA investors.
Do SDIRA investors require different documentation than other investors?
The investment documents are typically the same, but there are additional custodial forms and processes. The custodian needs to review investment documents and handle fund transfers from retirement accounts, which adds some steps to the process.
How long does it take to close SDIRA investments?
With an experienced custodian like Forge Trust, SDIRA investments can close in a similar timeframe as traditional fundraising. The key is having systems in place to solicit SDIRA investors and accept their capital, with a custodian that can efficiently process the associated documentation.
Zander is a seasoned product leader with a 12-year history in financial technology, specializing in private market investments. His tenure includes roles at LTSE, Alto, and IHS Markit, where he focused on product management and strategy. Zander holds an MBA from Vanderbilt University, focusing on International Business, and a B.A. in Economics from Colby College.