Hi Chris,
@Brian Burke made many excellent points. Private funds and investments are becoming much more popular as investors become frustrated with the stock market and other traditional investments. In addition, they are taking more control of their own retirement planning through the proliferation of SDIRAs (Self-Directed IRAs). I heard a statistic that certainly seems plausible - the SDIRA market has doubled each each year for the last 10 years, and is expected to continue that trend.
Traditional investments are much easier to evaluate. They are publicly traded, many analysts follow them, you can readily get advice from your financial adviser, etc. But private investments are, well, private. No ticker symbols. So analyst reports or recommendations. So they are much harder to evaluate. While the performance of these private investments and funds can easily outstrip the performance of traditional investments, the risk of a bad actor (principal) is certainly higher. And when it comes to private investments, the history, integrity and the experience of the principals involved is incredibly important.
Brian is correct, historically these private funds had to grow organically. But generally as a result of Obama's Jobs Act in 2013, the SEC now allows advertising, with certain restrictions. Initially, these investors had to be accredited, and their accreditation had to be verified. However, the SEC continues to ease its restrictions, and now allows unaccredited investors who respond to advertisements to invest in certain Funds, depending on how the funds were established with the SEC. You are likely going to see a continual easing of restrictions by the SEC, and with that, you will see not only the proliferation of many more private Funds, bit also the advertisement of these funds.
In general, this is all good for the investors. But investors need to proceed with caution, just as if you are driving on slippery roads. I have a few recommendations:
1. There is no rush. Take your time. Do your homework. If the investment is good today, it will be good tomorrow. If not, it probably was not a good investment to begin with. I learned along time ago that as soon as I thought I missed a great opportunity, there was another one not too far away.
2. Don't get fixated too much on the return. Focus on the risk instead. A critical question to ask is "How will I get my investment back?" A 10% return means very little if you lose your principal. First and foremost, think principal preservation. then return. If you are not comfortable with the exit strategy for the investment, don't invest, regardless how much they are willing to pay you for the use of your money.
3. Focus on the sector/opportunity you are investing in. If you can't easily understand it, then don's invest in it. If its too complex, how can you realistically underwrite the risk? There are plenty of opportunities that are not complex.
4. Get LOTS of information. If the principals are upstanding, they should readily provide you with all sorts of information for you to evaluate the opportunity. Some key aspects of their business model logically may need to be confidential, but the vast majority of what you need to evaluate the deal should not be. And if you can't get what you want to evaluate the opportunity, then don't invest.
5. Work with experienced, principals with a successful track record. The likelihood they are going to continue to be successful is much higher. Nobody is perfect, and I would certainly be suspicious of anyone who has been in the private investment business for any length of time who purports they have never lost money on a deal. But the preponderance of their deals should be successful. Get references from existing longer-term investors, and check them out.
6. Ideally, invest in opportunities in which the SEC has been notified of the opportunity. Nobody wants to make the SEC unhappy, just like no one wants to make the IRS unhappy. Most private funds and investments are actually selling securities, which thereby falls under the SEC's jurisdiction. It also falls under state securities jurisdiction. The principals should readily be able to provide you documents that shows that notification has been filed with the SEC. You can then get on the SEC website to confirm that the documents are legitimate. The investment also has to be registered with each state, but typically not until there is an investor from that state that has invested in the opportunity.
Private funds are a wonderful investment opportunity, I strongly suggest investors look into them. Just take your time and do your homework.
