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The ABCs of DPPs: The rise of a new alternative asset class

Direct participation programs, often called DPPs, are emerging as an alternative asset class for retail investors, typically generating an income stream of 5 percent to 7 percent.

DPPs are non-traded pooled investments that invest in real estate or energy-related ventures seeking funds over an extended time period. These products have a finite life, generally five to 10 years. DPPs are generally passive investments.

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New products are on the way to include these non-market-correlated investment vehicles into individual portfolios.

These direct investment programs are not to be confused with direct purchases of stocks from publicly traded companies.


"DPPs are referred to as a 'public market' because they are all publicly registered entities," said Keith Allaire, managing director for Robert A. Stanger and Co., an investment bank and advisor for the DPP industry.

As of Sept. 30, there were 70 public offerings, valued at $93.3 million, according to Stanger research.

These publicly registered entities facilitate investments into private companies.

Traded vs. untraded

Looking at traded vs. non-traded investments, such as real estate investment trusts, Allaire said that "traded products tend to focus on the sentiment of the market, while the untraded ones focus on the underlying value."

The most common DPPs include:

  • Non-listed real estate investment trusts (REITs) — about 65 percent of the DPP market.
  • Non-listed business development companies (BDCs), which are debt instruments for small businesses — about 32 percent of the market.
  • Oil and gas programs, such as royalties or tax deductions.
  • Equipment-leasing programs, in various industries.

"While these products are available to retail investors, they come with restrictions — mostly because of illiquidity, not necessarily risk," said Gary Sidder, a certified financial planner and president of financial advisory firm Life Transition Partners.

DPP industry statistics for calendar year 2014

  • More than 30,000 financial advisors used non-listed REITs or BDCs in their practices.
  • More than 1.2 million investors had non-listed REITs or BDCs in their investment portfolio.
  • Approximately $16,900 was the average account size.
  • 43 percent (or $9.2 billion) was invested through qualified accounts.

Source: Investment Program Association


Eligible clients must meet certain asset and income qualifications, in part because the investments have limited liquidity for several years, depending on the terms. The financial threshold for clients to participate in these programs is commonly $70,000 income and $70,000 net worth, or $250,000 net worth, although there are variations by state.

"We get into them for the income," Sidder said. "[These instruments] are paying an income stream — coming from tenants paying rent, companies paying back interest payments on equipment leasing, and BDCs paying back loans.

"Within the last year or two, broker-dealers have become more comfortable with these products, because they can now be held within an advisory account," he added.

According to Don Wilde, CFP and owner of W Financial, "these products have a structure similar to a mutual fund, with a sponsor and a management company who does risk analysis and makes investment decisions."

Wilde offers pros and cons to these products.

"One con is that you are investing in private companies who don't have to disclose all of their financials," he said. "Therefore, there is some additional risk, which is why financial thresholds are imposed."

Another con is illiquidity, Wilde said. "I view [a DPP] as a long-term investment similar to a bond that is held for five to seven years," he said.

Illiquidity can also be considered a pro, by preventing a client's "panic for the exit" during a downturn, Wilde added.

Growth in interest, products

Since 2008, interest has grown in investments that are not correlated to the stock market, said Daniel Wildermuth, CEO of Kalos Capital, a broker-dealer with a strong interest in non-traditional assets.

"As demand increased, products have come to market to meet that demand," he said. "New BDCs were developed for the growing retail market, offering products that raise capital over time rather than in one day, such as in an IPO."

DPPs have not been widely known, Wildermuth said, for two main reasons: As direct investment vehicles, they were not used by wire houses, and they are typically commission-based, which advisors are avoiding more and more as they moved to fee-based compensation.

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The DPP industry expanded significantly between 2009 and 2014, growing from more than $6 billion in funds raised to more than $21 billion, according to the Stanger Market Pulse.

The industry is planning on more such growth.

"We're reinventing ourselves to some extent," said Kevin Hogan, president and CEO of the Investment Program Association, the trade association for the DPP industry.

"Finra [The Financial Industry Regulatory Authority] is currently designating new share classes and products, which will ultimately have wider appeal due to their enhanced transparency and new structures," he said.

"We're in such a yield-starved environment, and these products can provide yields in the 6 to 7 percent range," Hogan added.

— By Deborah Nason, special to CNBC.com