While true diversification is a critical component for a successful portfolio, I would argue the number one reason to invest in private placements is the benefit of above-market returns combined with below-market volatility.
Cambridge Associates, an index that tracks private equity performance, reports that since 2000, Private Investments experienced an impressive 16% annual return compared to 7.4% from the S&P 500.
There are several explanations for private investments like private equity and private debt outperforming public offerings. Chief among them are the advantages of early-stage investing, which can not be overstated.
Private placements offer investors an opportunity to participate in early, private rounds of financing before a significant exit event like IPO, buyout or merger. This early stage creates the most value and significant upside potential. Investing in real businesses, especially ones with recurring revenue like real estate, at an early stage means that investors benefit from growth and significant potential upside from expansion.
Early stage investing, before value creation, is where
investors can potentially make the highest returns.
How many times have you heard people say “I wish I had invested in Amazon, Facebook, Twitter etc. before they went public?” It’s because those early investors that invested in the company at lower prices were also the investors who gained the most from their IPOs.
The investors that bought equity early in those companies enjoyed incredible returns, sometimes in multiples of thousands. And the vehicle through which those early investors invested pre-IPO was through private placements. Every investor has a company they wish they bought into earlier. This opportunity is their “one that got away.”
With private placements, investors have the
opportunity to invest early and maximize gains.
Investors can expect high returns and a shot at a home run investment with the added benefit of less volatility since private placements do not correlate with the stock market.
Buying a public stock low and selling it high leads to significant profits. These profits are magnified in the private sector because companies treat their investors better. What the company has to gain from selling private securities is raising funds without jumping through regulatory hoops. This saves time and money allowing the early stage company to operate efficiently and cost-effectively, leaving more profits to distribute to their investors.
There is another side to that coin though. Because offering private securities is easier, the company typically offers its investors a better deal. The ability to operate without regulatory handcuffs and without standard middleman fees like from brokers and advisors allows private investments to offer higher rates and provide more equity in the company. And without the typical broker and advisor fees associated with traditional investments, private placement investors end up with more money in their pockets than their public equity investing counterparts.
These benefits make your investment gains even more pronounced enabling you to generate greater wealth. Although I find the returns potential the most persuasive reason to invest in private placements, I still have another great reason, quite compelling to many, to share with you.