The CIO to You
The main reason Addepar handles alternative assets well is simple: it has the transactions those investments require built into the system.
Traditional brokerage accounts are relatively straightforward. Most of the activity consists of purchases, sales, dividends, interest, capital gains, capital losses, and stock splits.
Alternative investments have a completely different set of transactions. If you invest in private equity, venture capital, a hedge fund, real estate, or a private business, simply showing the asset’s current value is not enough.
Take a private fund as an example. You may commit capital before any money is actually called. The fund might then call that capital in several stages. Later, it may make distributions, return capital, report income, or provide a new valuation.
Each of those events needs to be recorded differently.
A return of capital affects the investment differently than income or the sale of a position. A private investment may only receive a new valuation quarterly, rather than having a price that updates every day. If you eventually close out the position, you need to be able to see how much capital went in, how its value changed, what was distributed, and what the final result was.
Addepar was built to handle those distinctions.
Other reporting systems can usually place an alternative investment on a report as a line item and assign a value to it. The question is whether that information will remain meaningful over time.
If the system only tracks the latest value, it leaves out much of the investment’s history. It may not show how capital was contributed, when it was called, how distributions were treated, or how those events affected the cost basis.
That is where I see the biggest difference between Addepar and systems such as Orion, Black Diamond, and Tamarac. Those platforms can accommodate alternative assets to varying degrees, but Addepar is much further ahead in tracking the transactions behind them.
The distinction is not whether an investment can appear on a report. The distinction is whether the system can accurately show what has happened throughout the life of that investment.
Addepar also has strong data connections with different providers. When a private-equity firm or another investment provider has an available data feed, transactions can be sent directly into Addepar and displayed for the client.
When a direct feed is not available, Addepar also makes it easier to create and maintain custom assets.
For example, a client may own a duplex that produces income. Another client may have an interest in a private business. Those assets do not sit inside a Schwab or Fidelity account, but they still need to be included in the client’s overall financial picture.
Addepar provides the flexibility to configure those assets and record the relevant activity even when the information has to be entered manually.
Canoe can help fill some of the remaining gaps. It can collect information from statements provided by private-equity firms, venture-capital firms, and other investment managers, then push that information into Addepar.
If someone invests in a hedge fund, the reporting should show the capital going in, the changing valuation, any distributions, and the eventual gain or loss when the position is closed.
It should also distinguish between a distribution recorded as income and one recorded as a return of capital. Those are not the same event, and treating them as though they are can create an incomplete picture of the investment.
That is why I view Addepar as particularly strong for portfolios containing substantial alternative assets. It was designed with these investments and their transactions in mind.
Other systems may be able to show that an alternative investment exists. Addepar is better equipped to show what is actually happening inside it.
Written by Ethan Dunbar, CIO of Revisor Inc.
Free consultation
30 minutes, no pitch, just answers.
