Term Sheet Red Flags Investors Should Never Ignore 

Before committing capital to a private or alternative investment, one document matters more than any pitch deck: the term sheet. In this episode of Alt Investing Made Easy, we break down the most critical term sheet red flags investors should never ignore when evaluating private deals.

Whether you’re reviewing commercial real estate, private credit, or private equity opportunities, understanding how to spot hidden risks is essential to protecting downside and improving long-term returns. Too many investors rely on optimistic projections instead of disciplined private investment due diligence—and that’s where costly mistakes happen.

This episode simplifies complex legal and financial concepts into a clear, allocator-grade framework. We walk through real-world warning signs like excessive fees, unrealistic underwriting assumptions, weak transparency, illiquid structures, and conflicted sponsor roles. If you want a practical checklist for evaluating alternative investments with confidence, this episode shows exactly where to look—and what questions to ask—before you invest.

Top Takeaways

1. Alignment matters more than projections
   If sponsors don’t have meaningful capital at risk, investors should question incentives and downside discipline.
2. Fees can quietly destroy returns
   Management fees, admin costs, and early performance carries often look harmless—until you follow the full fee waterfall.
3. Great deals plan for things going wrong
   Perfection-dependent underwriting is a red flag; smart sponsors stress-test downside scenarios and share them openly.
4. Transparency is a risk-management tool
   Consistent reporting, clear KPIs, and honest communication—especially during tough periods—separate trustworthy sponsors from risky ones.
5. Liquidity must be engineered, not promised
   Short-term liquidity claims in illiquid private deals often create legal and financial trouble when reality hits.

Notable Quotes

• “If they won’t risk their own capital, why should you?”
• “Every time I review a deal, the first thing I search for is fees.”
• “Good allocators ask: what does this deal look like when things go wrong?”
• “Transparency isn’t optional—it’s part of the job.”
• “Liquidity doesn’t magically appear in private markets. It has to be engineered.”

Chapters

• 00:00 – Welcome & Episode Context
  Introducing the Term Sheet Teardown series and why red flags matter.
• 00:52 – Red Flag #1: Sponsor Capital at Risk
  Why “skin in the game” goes beyond sweat equity.
• 02:28 – Red Flag #2: Excessive or Hidden Fees
  Management fees, admin costs, and early carry triggers.
• 04:13 – Red Flag #3: Related-Party Transactions
  Disclosure, market pricing, and why clean structures matter.
• 06:46 – Red Flag #4: Perfection-Dependent Underwriting
  Unrealistic assumptions, missing downside cases, and stress testing.
• 09:07 – Red Flag #5: No Independent Audit
  What unaudited financials imply—especially in small teams.
• 11:04 – Red Flag #6: Limited Reporting Transparency
  Investor communication, KPIs, and handling bad news.
• 14:21 – Red Flag #7: Illiquid Structures With Short-Term Promises
  The danger of offering liquidity without a real plan.
• 16:07 – Red Flag #8: Patchwork or Mismatched Track Records
  Why only relevant experience should count.
• 19:12 – Red Flag #9: Vague Use of Proceeds
  Required disclosures and questions investors should ask.
• 20:30 – Red Flag #10: Conflicted Sponsor Roles
  Efficiency vs. conflict—and why disclosure is everything.
• 22:28 – How to Get the Term Sheet Teardown PDF
  Free checklist and framework for subscribers.
• 25:08 – Closing Thoughts
  Final advice on disciplined alternative investing.

Credits

Sponsored by Real Advisers Capital, Austin, Texas

If you are interested in being a guest, please email us.

Podcast Production by Red Sun Creative, Austin, Texas
(https://redsuncreative.studio)

Disclaimers

“This production is for educational purposes only and is not intended as investment or legal advice.”

“The hosts of this podcast practice law with the law firm, Ferguson Braswell Fraser Kubasta PC; however, the views expressed on this podcast are solely those of the hosts and their guests, and not those of Ferguson Braswell Fraser Kubasta PC.”

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