Topics: Alternative Investments, Deal Sponsor, Fund Manager, Venture Capital
The first challenge of any VC investor, PE professional, or fund manager, in general, is to raise money from LPs. For fund managers looking for capital, we discuss in a previous post 20 channels to explore when sourcing new LPs. Of these 20 channels, the self-directed IRA is the one we get asked about the most.
As a reminder, IRA stands for Individual Retirement Account. In short, IRAs provide a way for individuals to save money for retirement while reaping specific tax advantages, depending on the type of IRA.
The four common types of IRAs:
Most IRAs hold traditional assets that are publicly traded, such as stocks and bonds. A self-directed IRA, however, allows individuals to invest their tax-advantaged savings into alternative investments like real estate, small businesses, and more. In turn, sponsors or VCs who raise capital can offer LPs the ability to invest IRA money into their offerings.
For context, as of 2021, the total assets of IRAs in the United States reached a value of 14 trillion U.S. dollars and are growing, according to Statista. This shows how attractive it can be for fund managers to tap into that source of capital. And according to the Retirement Industry Trust Association (RITA), self-directed IRAs represent 3% to 5% of total IRA assets. That’s a good, estimated range of $420 to $700 billion that fund managers could tap into.
An LP might want to use IRA funds to invest for the following benefits:
Most investment fund managers do not associate IRA with VC investment. This is because Traditional and Roth IRAs only allow funds to be invested into publicly traded stocks and bonds, preventing investors from putting their savings into privately held companies, such as venture capital.
These limitations do not apply to self-directed IRAs, which do allow investors to put their retirement money into non-traditional investments.
If you are a fund manager looking to raise money for your next VC round, you must be wondering whether you are eligible to collect IRA money and what process you need to follow to do so.
As a rule, a venture capital firm can accept retirement money from investors if the firm does not facilitate investments deemed "prohibited." You can find more details about prohibited behaviors and investments here, but in summary, IRA money should not be invested into:
If you want to take the leap and are serious about tapping into the potential of a self-directed IRA to fund your VC fund, here are the three simple steps to follow
Generally, the IRA money is held with the IRA custodian. However, the funds are invested only upon the direct request of the IRA holder. A custodian-controlled structure like AET allows IRA owners to invest in alternative private assets, such as venture capital funds but requires the agreement of the custodian. If approved, the IRA custodian will proceed with the VC fund investment.
If you need assistance navigating the process to receive self-directed investment, or if you are unsure how to introduce this option to your limited partners, you can reach out to the AET team at any time, and our specialists will be more than happy to assist.
As with everything related to investment, there are a few rules to know and follow to allow an investor to invest through their IRA. But the complexity of these rules is low and should not be an obstacle to investing, especially when considering the tax upside provided to IRA investors.
As a fund manager, once you have gone through that process, you will quickly become familiar with the matter and be better armed to pitch it to your LPs. This puts you in an excellent position to benefit from IRAs as an additional source of capital.
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Alternative Investments , Deal Sponsor , Fund Manager , Venture Capital