Investing in the private market can be a great way to gain returns unavailable elsewhere. With the right research, investments in private companies can yield higher returns than traditional public markets. With the size of the global private markets growing throughout the past two years, notably in North America, investors must know what to consider before investing in a private company. In this blog, we will look at some key considerations for investing in the private market.
Pros & Cons for Non-Accredited Investors
Investing in privately-held businesses can be an exciting way to:
- Diversify a portfolio
- Offer access to investment opportunities that are not available through the public market
- Potentially provide higher returns than traditional stock and bond investments
However, non-accredited investors (those who do not meet certain SEC criteria) need to understand the unique regulatory and financial risks associated with private markets before making an investment decision. Consider the cons of divesting in private companies, such as:
- Requires a higher amount of due diligence
- Lower liquidity than publicly-traded securities
- Can be seen as risker investments than public securities
Evaluating Potential Investments
Before investing, it is important to conduct due diligence and research a potential investment thoroughly. Consider creating a financial plan and closely examining the deal structure, competitive landscape, and why the company needs your investment. Also, take a look at the company’s management team as well. Do they have experience raising capital? Do they pass a bad actor check?
Comparing Private and Public Investments
Private investments may offer higher potential returns than those found in the public markets, however, they are often riskier. As an investor, you should be aware of the differences between private and publicly-held businesses before deciding to invest. Consider factors such as liquidity, transparency, and financial reporting.
Liquidity: Private investments are sometimes illiquid, meaning that it may be difficult to access your money when needed. However, securities purchased through RegA+ are freely tradeable on a secondary market, which can provide some options for liquidity. In contrast, investments in public companies can be sold on the open market quickly and easily.
Transparency: Public companies must adhere to strict disclosure rules that allow investors to clearly understand the risks and rewards of their investments. In comparison, private companies do not have the same regulatory requirements and may be less transparent with their operations or provide limited information to shareholders. This means that investors should carefully review materials provided by the issuer to get a better understanding of the investment risk to ensure it meets their level of risk tolerance.
Financial Reporting: Public companies are required to report quarterly earnings and provide other financial information to investors regularly. This is not always the case with privately-held businesses which may only provide periodic updates or no financial information at all.
Protecting Your Investment
As an investor in a privately-held business, you may be at the mercy of the majority shareholders and can be subject to financial losses if the company does not succeed. To protect yourself, it is important to conduct background checks on all potential investments and set terms for your investment up front. Be sure to understand what rights you have as an investor and any restrictions on transferring or liquidating your shares. Especially if investing in JOBS Act exemptions, like RegA+ or RegCF, if the company you are looking to invest in offers a third-party option where you can sell your shares, this is a great way to access liquidity options.
Diversify Your Portfolio
The key to success with private investments is diversification. Investing in various companies across different sectors can reduce the risk of investing in a single business or startup that may not succeed. This will help to spread out any potential losses should a particular business not perform as expected.
Investing in the private market can be an exciting and rewarding venture for non-accredited investors. Understanding the risks and potential rewards of each potential investment is essential for any investor looking to make a profit in this sector. Ensure that you are comfortable with the risk associated before investing in any venture. Doing so will help to minimize potential losses and maximize potential gains. With careful planning and research, investors can benefit from private investments and diversify their portfolios.
Additional knowledge sources
https://www.investopedia.com/articles/stocks/08/privately-held-company-investing.asp