private market investments

Exhausted by the daily market moves?

Last year (2022) was tough; stocks and bonds moved in tandem (negatively) for only the fourth time in history. The S&P 500 and Barclays Aggregate returned negative 18.1% and 13.0%, respectively.  On top of that, there were 65 trading days last year when the S&P 500 fell by 1% or more, which hasn’t been reported since 2008.

Around-the-clock accessibility to the PUBLIC markets is a benefit and a curse.  Logic, not emotion, should drive investment decisions.

Let’s Define Private Market Investments

Private market investments are an “alternative” investment class that offers investors a way to invest capital without the “noise.”  Historically, only large institutions and ultra-high-net-worth investors had access to private markets.  However, the evolution of investment structure and regulation allows greater accessibility to qualified investors.

Characteristics of Private Market Investments

  • They are typically not traded on an exchange.
  • They may be considered part of broader asset categories, such as:
    • Private Equity
    • Private Credit
    • Real Assets (i.e., real estate)
    • Hedge Funds*
  • They offer alternative sources of return, income, and diversification.
  • They generally are not correlated to the public markets.

*Although considered a product and not necessarily an asset category, hedge funds are often lumped in this bucket.

Are Private Market Investments suitable for you?

Here are a few things to think about:

Investor Qualifications

This depends on the investment; familiarize yourself with the requirements of the following definitions:

Time Horizon

These are typically illiquid investments, at least initially.

  • The initial lock-up period may be one year or longer.
  • Subsequent redemptions may be limited to a quarterly frequency and a certain percentage of your initial investment.

Remember, fund managers establish these constraints to execute their investment strategy, which may take years to monetize. For example, suppose they had to manage their investment strategy based on emotional investors that need their money on unpredictable schedules. In that case, the manager may be unable to capitalize on an investment’s full potential.

Tax Return Implications

The advent of new products means each investment will report income differently.

  • 1099s: This form is used for most investment accounts and is likely the most familiar from an investor’s standpoint.
  • K-1s: Many privates issue a K-1. Be sure you’re aware of the timing, as these forms often are the genesis behind tax extensions.

Account Type

There are usually two choices here:

  • Retirement (IRAs/Roth IRAs) – The tax-deferred treatment is appealing for the income associated with privates.
  • Taxable (Trust/Brokerage) – Private market investments must represent a long-term time horizon.

Is Now The Time?

After witnessing 2022, it’s clear that what may have worked in the past may not work in the future. We’re excited about the increased accessibility retail investors have to the private market investment space. On top of that, we’re even more enthusiastic about having access to the same caliber of due diligence questionaries that we had at the institutional level. Remember, these investments are not appropriate for all investors. Suitability is still paramount!

Connect with us to discuss if private market investments are appropriate for you.

All views, expressions, and opinions in this communication are subject to change. This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services.