When people hear the word “investing,” they often think of stocks, bonds, mutual funds, and so on, not realizing that there is another world of investment opportunities in the private market.
Just because a company isn’t traded publicly on an exchange like the NYSE, doesn’t mean it isn’t worthy of serious investment consideration. Companies like Cargill, Kaiser Permanente, SpaceX, and Publix are all privately held, wildly successful companies. In fact, some of the greatest investment opportunities available are not traded publicly.
America’s stock market is shrinking. In the year 2000, there were roughly 6,600 publicly traded companies; as of this writing, that number has dwindled to around 3,500. Alternative assets such as private stock or private equity are now common in a well diversified portfolio.
What is Meant by Private Investing?
Private investing is investing outside of the municipal sphere. It is also called investing in alternative asset classes. Examples of alternative asset classes include private equity, private debt, real estate, venture capital, and commodities — assets that aren’t necessarily correlated with stocks or the stock market.
Increased returns by way of portfolio diversification is a primary reason that people invest in alternative assets. It’s a solid investment strategy. In fact, historically, private equity investments have returned investors gains superior to that of their public equivalents.
There is a common misconception that companies haven’t hit the big time unless they are listed on the NYSE. This couldn’t be further from the truth. There are many companies in the U.S. that have been generating profits for hundreds of years. They have a proven track record and there is no real benefit to the company for them to be traded publicly.
Conversely, there are many great start-up companies that need capital in order to get their footing. Getting in on the ground floor before the company has fully established itself in the marketplace, or before it’s bought out by a larger company, can be a great long-term investment. Remember, Amazon started out as a small online bookseller.
How Do You Get Started in Private Investments?
New investors often go the path of least resistance. It is very easy to get set up to trade in the stock market — choose a brokerage, link a bank account, and away you go. Investing in the private market can throw up some roadblocks that prohibit some would-be investors from participating.
For some, investing in the private market can be cost-prohibitive if the target investment has a high buy-in. Sometimes, only investors with a high net worth are able to participate. However, the SEC’s (Securities and Exchange Commission) Regulation A — an exemption from having to register for public offerings — allows companies to accept equity investments from the public up to and including $75MM. Regulation A gives people who normally wouldn’t be able to invest an opportunity to do so.
The best way to get started investing in the private market is to consult with a professional with experience investing in alternative assets. That being said, it is possible to invest in the private market via the public market. There are ETFs (exchange-traded funds) traded on the public exchanges that are composed of privately held companies. Reach out to a professional to inquire about a private investment account.
If you are already investing in this type of asset with personal funds and are seeing good returns, you could do the same with your IRA. To get started, you would need to open a self-directed IRA. Move funds from an existing IRA or make a contribution to fund the account. Then, instruct IRAR to purchase the investment. Here is more on how to do this in your IRA.
As a side note, IRAR Trust is not a fiduciary and does not provide investment advice.
What are the Pros and Cons of Private Markets?
Fortune favors the bold, as they say. Being able to own part of an up-and-coming company can yield tremendous amounts of revenue. However, it isn’t as simple as just signing up and handing over your money — it’s who you know.
This is where fiduciary professionals come in. A well-connected fiduciary professional is an indispensable part of private investing. They can give you access to investment opportunities that you wouldn’t ordinarily have. They can also help you navigate the sometimes murky seas of private investing. Because these are not publicly traded companies, there is often less information available than with purchasing a company’s stock. You will need to rely on these professionals to keep up-to-date on the value of your investment, as there is no stock market app to pull up your phone to tell you how your investment is doing.
In addition to how much money can be made in the private market, another upside is that you may do your investing using your IRA. Depending on what type of plan you have, you could have tax-free or tax-deferred income.
How Can IRAR Help?
IRAR Trust Company has been helping clients self-direct their retirement for almost three decades. We are a dedicated team of experts that offer investment education and explanation of the rules and regulations governing self-directed retirement accounts.
If you are ready to take the next step in directing your future, IRAR is here to help. We look forward to hearing from you.