By Thomas Kostigen
Private equity has been largely reserved for the wealthy. Shares in companies that aren’t publicly traded often come with restrictions that make it difficult for average investors to obtain ownership. And that means Main Street investors usually can’t get in on investment banking deals that can turn into riches — shares in private companies that, when a public offering is made on a publicly traded stock exchange, soar in value.
According to Securities and Exchange Commission rules, private, unregistered secures can in most circumstances only be sold to individuals who have net worth’s of $1 million or more excluding their primary residence, or who earn more than $200,000 annually. Several years ago, the SEC amended the requirements to allow people who could prove that they are sufficiently knowledgeable, or who are registered representatives or investment advisors to also participate in private placements.
For the most part, private placements have been a bit clubby and exclusive. Hedge funds and private equity funds, after all, are where sophisticated financiers and titans make their billions. It’s a risky and competitive landscape, which is why the SEC issues such restrictions about the sale of private securities; it’s supposed to be for investor protections.
But the doors to the secret garden of private equity and venture capital are opening to more and more Joe Schmoes. Vanguard, the money manager to the masses, recently announced that it is launching a private equity fund that while at first is being offered to institutions, will eventually be offered to individual investors, as well.
Steven Cohen, the high-flying hedge fund manager after whom it’s reported the character of Bobby Axelrod in the television show Billions, is partly based upon, is also jumping into the private equity fray. There couldn’t be more of a disconnect between the low- to no-fee money management firm of Vanguard and Cohen’s inside Wall Street style of investing.
What’s driving both sides toward the middle is opportunity. There are about 40 times as many private companies as there are public companies in the United States alone. More companies mean more opportunities. Additionally, according to a report by the private equity firm Blackstone and issued to the SEC last year, the private equity market over the past 20 years has outperformed the public stock market with less risk.
The challenge for many investors is holding periods and illiquidity. Private investments cannot be bought and sold in seconds or minutes like public stock. It can take years before an investment can be sold. And many private equity firms have lockup periods of as long as five years, or even more — disallowing shares to be traded. In fact, the average holding period for private equity is more than six years, according to Pitchbook, a news and analysis firm that tracks venture capital and private equity deals.
This begs questioning whether individual investors should be investing in the private markets. Some financial advisors say yes — to a degree and only with the advice of a professional such as themselves. The maximum amount of assets allocated to private equity should tap out at around 15 percent of the total portfolio’s value, according to financial experts. And, it seems, more people are getting in on private deals. Last year some $300 billion flowed into private equity—a record amount.
For investors, private deals are worth a very public look.
Thomas Kostigen is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Thomas is a best-selling author and longtime journalist who writes about environmental, social, and governance issues.