The Pros, Cons, and Opportunities of Private Market Investing

The last few years have reinforced that being gainfully employed in a job providing a decent salary, 401K, and benefits may not necessarily guarantee financial security. Maybe it’s time to diversify your investment strategy so you don’t have all your eggs in one retirement or pre-retirement income basket. 

We’re going to discuss private market investing in this article. What is it? How can you invest in private markets? What are the benefits and risks? Fasten your seatbelts because it’s going to be an exciting ride!

What is Private Market Investing? 

Before we dive into the nitty gritty of private market investments, we need to answer, “What are private markets?” In a nutshell, a privately owned company is a private market - investors direct their investments into the equity or debt of a company that isn’t listed on the stock exchange. 

Private market investments are more of a long game than public ones, where liquidity is uncomplicated and investments are often shorter term. Where information about private companies is sometimes challenging to find, information about public markets is readily available and accessible. 

But, private market investing has seen a 170% growth rate in the last decade, according to the 2020 McKinsey’s Private Markets Annual Review. Conversely, there’s been a 50% decline in public investment options in the past 20 years. There are a few reasons for the growth in the private market but the most salient for individuals is that restrictions around being an accredited investor have been relaxed. 

Private markets include private equity, venture and growth capital, private real estate investing, private debt, infrastructures, and natural resources. 

 

Benefits & Risks of Private Market Investments

Investing has benefits and risks and it’s important to consider both sides of the coin. 

Private market investing can certainly give a healthy return but a wise person will take a beat to consider private markets from every angle. 

Here are a few points to ponder.

Benefits

There are many upsides to be had when making private market investments. Some of the most notable include: 

Diversification

Investors have wider access to innovative projects and more unique opportunities than are traditionally found in the public marketplace. For example, a private real estate investor will see that the dynamics of buying and selling in the private market significantly lower an asset’s volatility potential. 

Lower Volatility

Markets are known to be volatile; it’s just their nature. While private market investments aren’t completely immune to economic fluctuations, the private portfolio does experience a smoothing out over time. When the market is difficult, private market investments aid in minimizing the volatility of your total portfolio.

Higher Return Potentials:

Private markets simply outperform public ones due in part to the illiquidity risk premium which is the return an investor requires for investing in something that can’t be easily sold or exchanged for cash.

Unique Opportunities

In the private market, an investor has access to a wide variety of opportunities. The private market opens the door to the lifecycle of a company - from its inception through its growth. It also offers greater access to management and greater visibility of a company’s portfolio.

Long-Term Focus

Earlier in this article, we touched on how the public market is mostly focused on the short term. Private market investments are made with the long term in mind. The public market tends to react, sometimes very dramatically, during an economic downtown. As an investor, say in private market real estate, you have your eye on the future horizon and aren’t worried about these short-term fluctuations.

Risks

As with any type of investment, risk is inherent, but also able to be mitigated when you’re well-informed ahead of time.

Illiquidity

Securities on the public market enjoy daily liquidity. The same isn’t true for private market funds which are typically set up as limited partnerships. You need to be committed to a future view and keep in mind that the life of these investments could be 10 years or longer. Holding multiple long-term investments like these can be a tax burden so a healthy portfolio is a diverse portfolio.

Associated Costs

Management fees and incentive/performance fees are connected with private market investments. Management fees will be in the neighborhood of 1 to 2% and the incentive/performance fees can reach 20% (usually implemented when a specific target hurdle has been achieved). When there is a formal partnership structure set up, you can expect a cost to be attached to that. 

Speculative

Long-range investing is speculative and there isn’t a hard and fast guarantee that the promised return will materialize. In a worst-case scenario, there is a possibility you could lose part or all of the capital.

Access to Quality Managers

When you’re breaking into private markets like private market real estate, it can be a bit of a challenge to access quality managers. High minimum investments may be open only to a certain clientele.

How to Invest in Private Markets

With Regulation A, companies can raise up to $75 million in investment opportunities without registering with the SEC. This means that an individual like a private real estate investor who doesn’t have hundreds of thousands of dollars, or more, to invest in one transaction can still get on board in the private markets. 

Don’t let those millions or hundreds of thousands cause you despair because many investment opportunities, like with Connect Invest, can start as low as $500.

The best place to begin is with help from a professional market manager who will discuss the options with you. Look for an experienced team with a proven track record who will help you navigate private market investments and pinpoint the kind of high-value opportunities that were once the sole domain of institutional investors. 

For private real estate investing, online platforms like Connect Invest are an excellent option. Setting up an account is easy and as an investor, you’ll be able to choose your defined term and return rate. Your investment contributes to a diversified portfolio of private real estate projects. 

Final Thoughts: Getting Started with Private Investing

The keys to successful investing are solid research, risk assessment, and an experienced manager. Using their extensive experience, the team at Connect Invest built their online platform so unaccredited investors can build their best diverse portfolios. 

Are you ready to start private market investing? Sign up with Connect Invest today. If you have any questions, our team is happy to help you!