This is especially true if you’re seeking advice from traditional sources like financial advisors or investment brokers. If you take a meeting with these types of people, you will likely hear the same story over and over: Stocks, bonds, and nothing else. The problem is, these types of investments have some severe flaws. Bonds have low upside and are highly dependent on interest rates. Stocks are risky and unpredictable.
Andrew Lanoie, CEO of Four Peaks Capital Partners, believes that these conventional investments may have a place in a portfolio, but they should not be the entirety of it. High net worth individuals don’t need to settle for typical investments. Instead, they can look into better options that are outside of the mainstream. One option that provides high upside, diversification, and intrigue to your portfolio is private placements.
A private placement is a sale of securities that a company offers when they are trying to raise capital. What they offer is much like what you would find on a public market, but instead of being open to everyone, the opportunity is only open to a select few. This strategy allows the company to raise capital without having to go through the process of going public. A private offering is generally given early on in a company’s’ journey when they are seeking growth, but not ready to leap into the public sphere. There are also significant perks for the investor, as we will explain below.
Performance & Upside
The best reason to invest in private placements is their performance. As mentioned previously, companies issuing private placements get to raise capital without all of the regulatory headaches of a public offering. These benefits don’t come for free, though. The price they pay for these benefits is giving you, the investor, a better deal. With private investment, you will receive better interest rates, higher equity percentages, and better overall growth for your investment.
This better deal is reflected in the data, too. Cambridge Associates is an index that tracks private equity performance. From 2003 to 2013, they reported a 16% annual return for private investment. In that same time frame the S&P 500 returned 7.4%. In this time frame, private equity doubled the performance of public markets.
Investment in individual companies also provides something an index fund cannot: A home run. Safe investment plays will never offer the significant wealth gains that investing in a single company can provide. Monster Beverage Corp. has an annualized growth rate of 47% since the year 2000. Apple has 26% returns in that time frame. We see the same effect in the private sector, but with magnified returns. Because private placements give investors better deals than public stock, these kinds of gains will be further amplified.
Another contributing factor is that private placements are often offered in the early stages of a company’s journey. Investing in a company’s early stages provides more potential for growth. Every investor laments their decision to not invest in a successful company before it became an immense success. In private investment, you have to opportunity to buy in as early as possible and maximize your gains. With private placements, you can expect a higher than average upside and the shot at a home run.
When it rains, it pours. This is the case when your entire portfolio is in public markets. In the last decade, investors have experienced a slew of crashes, corrections, and general uncertainty. Between the recession of 2008, Brexit, and a variety of other missteps, investors have had to brave significant losses. Many of these investors have tried to diversify and protect themselves but failed.
One of the biggest misconceptions about investing is what strategies provide real diversification. Investors will opt to invest in an index fund rather than in individual companies, thinking that they are diversified. Then, the stock market plunges, and their entire index falls significantly.
Investors that attempt to diversify with bonds experience the same result. Both markets depress simultaneously, and their so-called diversified portfolio loses significant value. What investors often find during crises is that their portfolio was insufficiently diversified, or not diversified at all.
On the other hand, private placements are not correlated to the stock market. Your private investment relies solely on the performance of the companies you invest in. So when the stock market falls, your company and your investment can still thrive. This versatility is true diversification.
Some big-name examples of companies that rose significantly during the 2008 recession are Amazon, Ford, Domino’s, and Intel. Despite a rough economic climate, they were still able to keep providing service for their clientele and continue to grow. There are thousands of smaller-name, private companies that were able to do the same. Even if you are committed to keeping a high percentage of your wealth in traditional investments, diversifying with private placements is a smart strategy.
An underrated aspect of investing is being interested and intrigued by your positions. Investing in private placements gives you the opportunity to do something that is a bit outside of the box. You can research companies, find ones that you believe in, and be a part of unique and exclusive deals. Years down the road, one of those companies could be experiencing tremendous success and decide to join the public markets. While mainstream investors will just then be getting on board, you will have been invested for years.
As a high-income earner, you have access to opportunities that others do not. Private investment is one of those opportunities. You can add an asset to your portfolio that is interesting and truly unique.
There are many reasons to explore private placements as an alternative investment. First, their upside. Not only are average returns more than double that of a stock market index fund, but there is a chance of hitting an investing home run. Next, diversification. Great private companies will outlast the economic downturn and are an excellent investment that genuinely diversifies. Lastly, private investment is fun, engaging, and unique.
The benefits of investing in private placements are too significant to ignore. Inquire today to explore this intriguing investment opportunity.