Investments in other investment companies (2024)

Section 12(d)(1)(A) of the 1940 Act places the following limits on investments by investment funds in any registered investment company. Specifically, a fund is prohibited from:

  • acquiring more than 3% of a registered investment company’s shares (the “3% Limit”);
  • investing more than 5% of its assets in a single registered investment company (the “5% Limit”); or
  • investing more than 10% of its assets in registered investment companies (the “10% Limit”).

As Sections 3(c)(1) and 3(c)(7) of the 1940 Act (the exemptions relied upon by private funds to avoid registration as investment companies) indicate that companies relying on these exemptions will be considered investment companies for purposes of the 3% Limit but do not mention the 5% Limit or the 10% Limit, it has generally been assumed that only the 3% Limit applies to private funds. This assumption was placed in doubt by the March 2008 proposing release for Rule 12d1-4, which states in footnote 194 that “Both registered and unregistered funds are subject to these limits [i.e., the limits of Section 12(d)(1)(A)] with respect to their investments in a registered fund.” The New York City Bar’s Committee on Private Investment Funds requested clarification of this issue in a comment letter regarding the 2008 proposed rules but, as the rules were never adopted, no such clarification was ever issued by the SEC.

The SEC has indicated on an informal basis that only the 3% Limit would apply to private funds because Sections 3(c)(1) and 3(c)(7) provide that companies relying on these exemptions are only “investment companies” for the purposes of 12(d)(1)(A)(i). Private funds are not otherwise considered investment companies and would therefore not be subject to the 5% Limit and 10% Limit.

Funds with significant positions in registered investment companies should implement policies to ensure that they regularly determine whether they are in compliance with the above limitations.

Investments in other investment companies (2024)

FAQs

What is a company that invests in other companies? ›

Companies that private equity firms hold an interest in are considered portfolio companies. A financial sponsor and investors are required to create a private equity fund that invests in companies. Common approaches to investing in a portfolio company include leveraged buyout, venture capital, and growth capital.

What is investment in other companies? ›

Intercorporate investments refer to investments one company makes in another. Intercorporate investments are typically categorized under generally accepted accounting principles (GAAP) in three categories: investments in financial assets, investments in associates, and business combinations.

What are investments in other companies on balance sheet? ›

A company's balance sheet may show funds it has invested in other companies. Investments appear on a balance sheet in several ways: as common or preferred shares, mutual funds and notes payable. Sometimes they are made to put excess cash to work for short periods.

Who invests in alternative investments? ›

Alternative investments are complex and not heavily regulated. For this reason, most alternative asset investments are held by institutional investors or accredited, high-net-worth individuals. Due to their lack of regulation, private markets are notoriously opaque compared to public markets.

Why would companies invest in other companies? ›

Mergers can give the acquiring company an opportunity to grow market share without doing significant heavy lifting. Instead, acquirers simply buy a competitor's business for a certain price, in what is usually referred to as a horizontal merger.

What are three main types of investment companies? ›

The three types of investment companies are mutual funds, closed-end funds, and unit investment trusts.

How do you record an investment in another company? ›

The investor records their initial investment in the second company's stock as an asset at historical cost. Under the equity method, the investment's value is periodically adjusted to reflect the changes in value due to the investor's share in the company's income or losses.

Which is the most profitable investment? ›

11 best investments right now
  • High-yield savings accounts.
  • Certificates of deposit (CDs)
  • Bonds.
  • Money market funds.
  • Mutual funds.
  • Index Funds.
  • Exchange-traded funds.
  • Stocks.
Mar 19, 2024

How do you account for an investment in a subsidiary? ›

The two most common bookkeeping methods for a subsidiary are the equity method and the consolidated method. The parent company can ultimately decide whether to report the investment in a subsidiary using the equity method or consolidate for its internal financial statements.

Is other investments an asset? ›

Financial assets represent investments in the assets and securities of other institutions. Financial assets include stocks, sovereign and corporate bonds, preferred equity, and other, hybrid securities. Financial assets are valued according to the underlying security and market supply and demand.

Is an investment in another company an asset or equity? ›

The investment, itself, is an asset. Making an investment in a business creates owner's equity. That Is the essence of the accounting equation (Assets=Liabilities+Equity). The accounting equation is the first thing taught in school.

Is investment in another company an operating asset? ›

Operating assets do not include assets that are used for long-term investments, like marketable stocks, assets that have been put on sale, and investment assets, such as an investment property.

What is the most popular alternative investment? ›

Real Estate

Real estate is perhaps the most well-known alternative investment. Investing in real estate can provide ongoing cash flow and the potential for appreciation. Real estate generally has a low correlation to traditional investments such as stocks and bonds. Real estate investing can be done in several formats.

What are examples of alternative investments? ›

Alternative investments can include private equity or venture capital, hedge funds, managed futures, art and antiques, commodities, and derivatives contracts. Real estate is also often classified as an alternative investment.

How much should you invest in alternative investments? ›

Selecting The Right Alternative Investments

The Chief Investment Office recommends an allocation to Alternative Investments of 20%-30% for many investors.

What is the definition of other investment? ›

Other investment is a residual category that includes all financial transactions not considered direct investment, portfolio investment, or reserve assets. Like portfolio investment, other investment is primarily divided into investments that represent the financial assets and liabilities of an economy.

What is the meaning of investment company? ›

Investment companies invest money on behalf of their clients who, in return, share in the profits and losses. Investment companies are designed for long-term investment, not short-term trading. Investment companies do not include brokerage companies, insurance companies, or banks.

How does investing in companies work? ›

Stocks are a type of security that gives stockholders a share of ownership in a company. Companies sell shares typically to gain additional money to grow the company. This is called the initial public offering (IPO). After the IPO, stockholders can resell shares on the stock market.

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