By: Gary Hirsh, CPA, CFP®
Recently there has been considerable debate about providing investors with less than $5 million opportunities to invest in private equity (PE).
A prior SEC chairman said, “the requirement that allows only wealthy investors access to PE does not provide the same investment opportunities to smaller investors.” Investors with greater than $5 million investable net worth (excluding personal residence) are considered “qualified” investors. This categorization often opens access to funds not available to others.
The reasons for investing in private equity include realizing that much of the economic growth takes place outside the public markets.
Private markets may offer investors diversification that is difficult to access in the public markets by offering multiple themes such as growth, opportunistic, distressed, and private credit.
The companies publicly listed for investment on U.S. exchanges have been decreasing for much of the past two decades. However, the number of non-exchange traded companies on the OTC Markets has increased.
The obstacles recently cited in a 2016 study by iCapital were a longer-term investment lock-up period, higher minimum investments required, access to higher-quality offerings, lack of transparency and difficulty evaluating funds, integrating private equity into a portfolio, and high fees.
A recent paper titled “Asset Allocation and Return in the Portfolios of the Wealthy” by Cynthia Mei Balloch and Julian Richers studied various wealth groups. In short, they found that the smallest percentage of public equity was found in those with over $100 of wealth who also achieved the highest average annual return. The reason for this was the high relative return of their private equity venture capital along with the more significant number of positions held by the higher net worth investors.
Ultra-high net worth investors have unique opportunities only available to the top 0.01% of the population. Many people with over $5,000,000 in investable net worth may want to diversify their investments into some private equity and private real estate products. To even come close to matching the returns of the ultra-high net worth investors, it is essential to identify good managers at a reasonable cost.
For most investors, public markets that are transparent and liquid will still provide the best quality investments available to them.