Private Markets for Individual Investors: How They Work and What to Ask

Private markets for individual investors are getting more attention, from news stories, friends and financial professionals. Here is a surprising fact: the SEC notes that you may already hold an indirect stake in private equity through a pension plan or an insurance policy. Before you consider investing directly, it helps to know how these investments work and what can go wrong. This guide covers the basics for education only. It is not an offer or a recommendation.

How Private Markets for Individual Investors Work

When you buy a stock or a mutual fund, you can usually sell it on any business day. Private holdings work in a different way. Many are bought through a private fund, and a firm called the adviser manages that fund.

The SEC’s investor site explains that a private equity fund pools money from many investors. The adviser then uses that money to make investments for the fund. The adviser may be registered with the SEC, but the fund itself is not. As a result, these funds do not have to make regular public reports. The initial investment amount is also often very high.

Pension plans and insurance companies may put part of their large portfolios into private equity funds. That is how many people end up with indirect exposure. A direct investment, by contrast, means you sign the fund’s documents and accept its terms yourself.

Common Types of Private Market Investments

The term covers several kinds of assets. Here are some you may hear about:

• Private equity. Funds often buy a controlling stake in a business and work to grow its value. Others make smaller investments in fast-growing firms or startups.
• Venture capital. Funds back young companies, often at an early stage.
• Private credit. Funds lend money to companies outside the public bond market.
• Private real estate. Funds own or finance property, such as offices, apartments or warehouses.
• GP stakes. Investors buy a share of the firms that run private funds, rather than a single deal.

Each type has its own risks, fees and time frame. So it pays to look at each one on its own terms, rather than treating “private markets” as one thing.

Why Your Money Can Be Tied Up for Years

Time is one of the biggest differences. According to the SEC, private equity funds often have a time horizon of 10 or more years. Because of that, an investment is often illiquid. You may need to wait several years before you see any return, and funds typically limit when you can take money out.

Some registered funds offer a bit more access. For instance, an interval fund can hold less liquid assets, such as private companies, and buys back shares only at set times. Here is how the two compare:

	Private equity fund	Interval fund
SEC registration	The fund is not registered	Files a prospectus and shareholder reports
Getting money out	Limited, often after many years	Repurchase offers every 3, 6 or 12 months
How much you can sell	Set by the fund’s agreements	Only 5% to 25% of all shares per offer
Who can invest	Often accredited investors and qualified clients	Check the fund’s prospectus

Even with an interval fund, you may only be able to sell part of the shares you ask to sell. In short, plan to leave this money alone for a long time.

Who Can Invest: Accredited Investor Rules

Many private offerings are open only to “accredited investors.” The SEC’s investor bulletin explains that these offerings do not have to make the same disclosures as registered ones. So the rule aims to limit them to people who can weigh the risk or bear a loss. According to the bulletin, a person can qualify in a few ways:

• Income over $200,000 in each of the last two years, or $300,000 with a spouse or spousal equivalent, with the same expected this year
• Net worth over $1 million, alone or with a spouse or spousal equivalent, not counting your main home
• Holding certain securities licenses in good standing, such as the Series 7, 65 or 82

Other tests apply to trusts and businesses. In addition, private equity funds are often open only to accredited investors and “qualified clients,” which is a separate test. The fund’s documents will spell out who may invest, and the SEC can update these rules, so check the current version.

Key Risks of Private Markets for Individual Investors

Every investment carries risk. However, private markets add a few of their own. The SEC’s private equity page points to several:

• Less public information. Private funds do not file regular public reports.
• Fees and expenses. The SEC has brought enforcement actions over fees that were not properly disclosed, and it urges investors to stay alert.
• Conflicts of interest. A firm may manage several funds and companies at once, and its affiliates may also get paid for services.
• Limited access to cash. You may not be able to sell when you want or need to.

How to Review an Offering Before You Commit

A careful review starts with the paperwork. The SEC notes that the offering documents and agreements govern your investment for the life of the fund, including its fees. Then work through these steps:

1. Read the offering documents. Find out exactly what you are buying and how the fund plans to make money.
2. Map the lockup. Note how long your money will be tied up and how, if ever, you can get it out early.
3. Add up the costs. List the management fees and any other expenses, then compare them with other options.
4. Look for conflicts. Ask who else the firm manages money for and who gets paid for services.
5. Check the background. Search the firm and its people on the SEC’s free Investment Adviser Public Disclosure site.
6. Fit it into your plan. Decide how this would sit next to your savings, your goals and your need for cash.

In addition, talk with your own advisor and tax professional before you commit. In our group, that might include financial advisor John O’Hara or Larry Wefferling, CPA.

Private Markets for Individual Investors: FAQ

Learn More From Anthony Gaudiosi

Anthony Gaudiosi is a Senior Vice President at CAZ Investments, LP, a private markets investment firm. Founded in 2001, the firm has its headquarters in Houston. CAZ pools the commitments of its investor network to access private market strategies, such as GP stakes, energy, professional sports ownership and space and defense. The firm works with financial advisors, individual and high-net-worth investors and institutions through its funds, custom portfolio solutions and co-investments.

If you have questions about how private markets work, you can call or email Anthony, or request an introduction, from his profile page. He is part of our Planning Your Family’s Future referral team, along with professionals such as business valuation professional Larry Lynn. You can also browse the full member directory.

This article is general information for education only. It is not investment, tax or legal advice, and it is not an offer to buy or sell any security. Speak with a licensed professional about your own situation.