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Private investments are something of a mystery for many people.  Tales of huge returns for extremely wealthy investors that always seem to be at the right place at the right time can make private investing feel out of reach for the average investor.  But once you understand what exactly private investments are and how to access them, you can unlock powerful financial potential. So, let’s dive in!

This article is the first in a series that will break down the ins and outs of investing in the private markets.  At the end of this series, you will understand:

  • What private markets are and who is investing in them
  • How private investments fit into your portfolio
  • The major asset classes that make up the private markets
  • What to consider before investing in private markets and what their future looks like

What exactly are private markets?

Comprised of asset classes such as private equity, private credit, private real estate, infrastructure and more, private markets are investments that are not traded on a public exchange.  (We will take a deep dive into the private market asset classes later in this series).

To be crystal clear – private equity is not an interchangeable term for private markets.  Private equity is just one asset class within the broader private investment universe.  This series will help you understand private equity and its place within private investing by ensuring you understand the private investment world as a whole.

According to McKinsey & Company[1], the private markets account for only $6.5 trillion[2] of global investment dollars.  In comparison, the global stock market – publicly traded stocks, mutual funds, ETFs, etc. – is standing at $93.7 trillion[3].  The global bond market accounts for another $100.13 trillion as of 2017[4].

The smaller scale of private markets creates more opportunities for investors to identify “diamond in the rough” investments because of the relative lack of competition.  In the public markets, the most sophisticated investing shops in the world are duking it out at the largest scale possible.  Or put simply: lots of enormous fish in a gigantic pond.  Meanwhile, in the much smaller pond of private investments, those that were once mere guppies in the public markets can become the big fish.

Think of it this way:

Imagine you want to invest your money in a technology company. You gravitate toward proven tech giants like Google, Amazon, Apple, and Microsoft.  Like most people, you could invest in them on the public market via the Nasdaq stock-exchange.  At a fundamental level, stock exchanges are a vehicle for people to invest in mature, well-known companies that have grown big enough to open themselves up to investment from the general public. Investing in this way offers low minimum investment and potentially lower risk, but oftentimes relatively low returns if looked at from the greater investment universe perspective.

Now think of the thousands upon thousands of other, smaller tech companies that are largely unknown to the public. They need capital too, but without billions of dollars of market capitalization[5], they can’t access the publicly traded markets to find investors. This is where private investing comes into play. Private investments offer access to unique opportunities, high return potential, and diversification of one’s portfolio.  Of course, high returns often come with the trade off of high minimum investment amounts, high risk, and a reduction of liquid assets.  We will dive into everything you should consider before investing in the private markets later in this series.

 

Who are private investments for?

Now that we have a stronger understanding of what private investments are, the next logical question is who gets to access them?

Because of their sophisticated nature and long lock-up periods of up to 10 years on investments, there are very specific rules determined by the Securities and Exchange Commission (SEC) surrounding who can invest in private investments. Those that qualify under these guidelines are considered accredited investors.

Accredited investors include banks, insurance companies, brokers, trusts, investment funds and wealthy individuals.  When considered an accredited investor, these entities are able to access investments typically restricted from others.  There is no official accreditation process, rather the investment vehicle is responsible for vetting their potential investors as accredited according to the SEC guidelines.

For individuals to be considered accredited investors, they must hit the SEC’s benchmark requirements, including the sophistication to understand the risk associated with private investing.  However, a simple rule of thumb is that one must have at least $1 million of investable assets to be considered an accredited investor or reach certain income limits.  Until recently, minimum private investments used to sit at $1 – $5 million and usually came from institutional accredited investors.  Now, these same investment strategies have become more accessible to individuals and minimum investments of anywhere from $25,000 – $100,000 are seen often.

 

How do you access private investment opportunities?

So, you have the net worth and sensibility to be considered an accredited investor.  How do you find your private investing opportunities?  There are several ways, however unless you’re rubbing elbows with the right players and feel comfortable evaluating potential investments yourself, the safest avenue to private investing is with a Registered Investment Advisor (RIA) such as Denver Private Wealth Management.  Working with an RIA not only allows you to make educated decisions about your investment opportunities, it also gives you greater access to the private investment universe.

A well-run RIA can analyze different private funds and their investment strategies. Not only can they help bring potentially strong investments to the table, but they can also pool money from all their clients to invest in these private funds. By combining their clients’ money together, an RIA might facilitate an investment opportunity that would be hard to access as an individual investor alone.

 

Conclusion

Private investing is neither for the faint of heart nor the casual day trader, however it offers an avenue to generous returns and valuable portfolio diversification for accredited investors.  When entering the world of private investments, it is wise to work with a reputable Registered Investment Advisor, and to consider all the factors involved in investing outside the public arena.

Next up in the series:

We will explore how private investments fit into your overall investment strategies, and touch on what each private market asset class aims to accomplish within your portfolio. CLICK HERE to access the next article in the series.

At Denver Private Wealth Management, we believe knowledge is power. That is why we empower our clients with information focused on creating a solid financial future.  Help yourself to some of our previous articles:

 

 

 

CITATIONS

[1] Information from McKinsey & Company’s 2020 Global Private Market Review Report

[2] This figure includes $2T in buyouts.

[3] Numbers are in accordance with world exchange, full report can be found at https://www.world-exchanges.org/our-work/articles/2019-annual-statistics-guide

[4] Information is according to Securities Industry and Financial Markets Association 2018 report https://www.sifma.org/wp-content/uploads/2017/08/US-Fact-Book-2018-SIFMA.pdf

[5] The value of a company as reflected by the stock market itself

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