I’ve been in the investment world for the better part of thirty years, so I am often roped into conversations with folks who have heard about private investments, but also may have a lot of misconceptions. Most people simply have never heard what make’s a person qualified to do private investing…what is an Accredited Investor anyway? This is Deep Blue Financial’s Private Investment Guide for Accredited Investors.
An accredited investor, as defined by the U.S. Securities and Exchange Commission (SEC), is an individual or a business entity that is allowed to deal in securities that may not have been registered with financial authorities. They are recognized based on their net worth, asset size, governance status, or professional experience.
Common Misconceptions
It’s not uncommon to hear, “well, the person who runs the local branch office of the investment company I use has never mentioned private investments.” This statement underscores a prevalent misconception. The reality is many of the largest investment firms often have policies that prevent their representatives from delving into the arena of private investments. This is largely due to the unique risks and regulatory stipulations associated with private securities.
Many qualified accredited investors who have never heard about private investments may conclude that this type of investment is not appropriate, when in fact … the prime factor they may never have been presented with private investments is, that private investments are unavailable at their current investment company.
Risks Associated with Private Investments
Private investments come with a set of risks that are distinct from those associated with public market investments. Here are some of the risks:
- Liquidity Risk: Private investments are not easily sold or exchanged for cash without a significant loss in value.
- Valuation Complexity: Determining the current market value of private investments can be challenging due to the lack of a public market.
- Lack of Regulation: Private investments may be subject to less regulation than public market investments, potentially leading to a greater risk of investment fraud.
Categories of Private Investments
Private investments are broadly categorized into three types:
- Private REITs (Real Estate Investment Trusts): These are companies that own, operate, or finance income-producing real estate in a range of property sectors. They are known for paying high dividends, and they offer the potential for capital appreciation.
- Private Equity: This involves investing in private companies directly or through a fund. Private equity investments are typically illiquid and have a long investment horizon.
- Private Debt: This includes any debt held by or extended to privately held companies. Private debt provides a fixed income over a set period, albeit with higher risks compared to traditional bonds.
These categories help in diversifying an accredited investor’s portfolio, each offering a unique set of risks and rewards.
Historical Performance and Current Trends
The allure of private investments has ebbed and flowed with the economic tides. Private REITs (Real Estate Investment Trusts) were the darlings of the investment world as real estate prices sky-rocketed. They offered a lucrative avenue for substantial dividends amidst a thriving property market.
As the millennium dawned, the spotlight shifted to private equity. The early 2000s saw a surge in private equity investments, providing lucrative returns and making headlines in the financial circles.
However, the narrative began to change with the onset of banking crises. The fiscal tremors led investors to seek safer, yet rewarding harbors. Private debt emerged as a sought-after domain, promising higher yields in a shaky economic landscape. The higher-yielding debt opportunities offered by private debt started to attract those looking for stable returns amidst the financial tumult.
Each of these private investment avenues reflects the economic zeitgeist of its time, showcasing the evolving investment landscape and the continuous search for balanced risk and reward in complex financial terrains.
Deep Blue Financial’s Approach
At Deep Blue Financial, we tread carefully when it comes to private placements. These are considered only for clients whose savings significantly surpass their retirement needs. Our initial step is to ensure that clients meet the accredited investor standards, a regulatory threshold set to safeguard individuals from the risks inherent in unregistered securities.
However, meeting this criterion is merely the starting point. We delve deeper to ensure our clients have a robust understanding of the risks tied to private investments. Our in-depth consultation process helps clients grasp the liquidity risks, the valuation complexities, and the regulatory framework surrounding private investments.
Our approach is rooted in a deep commitment to safeguarding our clients’ financial future while opening doors to potential high-reward opportunities that private investments can offer. By taking a cautious, informed, and client-centric approach, we strive to navigate the complex waters of private investments together with our clients, ensuring a safe and informed journey towards achieving their financial goals.
[Investopedia – The Role of Accredited Investors](https://www.investopedia.com/terms/a/accreditedinvestor.asp)