It’s time to take control of your investments by investing directly – particularly in specific private companies (i.e., direct private investments or DPI).
The wealthy have long preferred direct private investments because it gives them control over accomplishing their investment objectives. Instead of investing in a mutual fund or ETF, where fund managers make investment decisions for a fee, DPI puts the control and decision-making squarely in the hands of the investor.
It’s not unlike the different types of IRAs. Think of the difference between a traditional IRA that puts the control in the hands of an administrator and a self-directed IRA (SDIRA) that puts investment decisions in the hands of the account owner.
Ultra-wealthy investors have clear investment objectives, and they want to be able to invest directly in companies and opportunities that best fulfill these objectives.
For starters, what are the most important objectives for the sophisticated investor?
- Reliable Cash Flow. Consistent passive income allows the investor to take their hands off the wheel to prospect, evaluate and participate in other opportunities to generate multiple income streams that can replace the income from a job. Passive income is an essential ingredient for achieving financial freedom.
- Tangible Asset. Tangible assets like commercial real estate and productive businesses have an underlying value that appreciates over time and prevents an investment’s total or near total loss because the underlying asset can always be liquidated to soften investment losses.
- Generational Wealth. The wealthy look beyond their lifetimes when making investment decisions. They’re thinking about future generations and investing accordingly in assets capable of generating cash flow now and in the future and that will appreciate and be around in the future.
- Tax Benefits. Tax benefits are vital to the wealthy investor who consider a dollar saved in taxes just as valuable as an extra dollar of revenue generated. They leverage tax benefits associated with particular assets to maximize returns.
- Insulated from Volatility. The wealthy value illiquid assets insulated from broader market volatility and irrational investor behavior (herd mentality). This noncorrelation to broader markets takes investors’ minds off of general market volatility that can be triggered by the most minor of stimulants.
- Hedge Against Inflation. Essential assets will always have demand and can generate income that tracks with or exceeds inflation – thereby muting the effects of rising prices on buying power. This hedging ability sustains portfolio performance and preserves wealth.
Private investments are a big deal. Well over $2 trillion of privately placed securities are sold annually in the U.S. This is more than issued publicly. All DPI are sold privately by the issuer directly to investors and are exempt from registration through a private placement exemption from registration under SEC regulations.
So why DPIs? Why do the wealthy gravitate toward DPIs? Because DPI offers investors advantages they can’t find through public equities or debt, namely:
- The potential for greater returns at less risk (in the right hands).
- More meaningful investments. DPIs offers an investor the opportunity to invest in companies and assets that align with their own values. Instead of investing in public companies with sketchy international business practices (i.e., child labor), DPIs allow investors to evaluate and vet accessible and sometimes local private companies that make themselves available to answer potential investor questions and address concerns.
- The opportunity to earn absolute returns through either preferred equity returns or debt that is uncorrelated to public markets allows sophisticated investors to make educated projections and create reliable models for building and maintaining multigenerational wealth.
Do DPIs have drawbacks? It depends on how you look at it.
Private investments are illiquid. They don’t have an active secondary market as resale is restricted and, as a result, are usually held by the investor until the underlying business or asset is sold or refinanced. Some view this illiquidity as a drawback, but sophisticated investors will tell you it is an advantage because it prevents the asset or business from widespread volatility.
Wall Street wants you to believe that private investments are riskier than their public counterparts because higher returns are typically accompanied by higher risk. However, what Wall Street won’t tell you is that the potential sources of risk in private investments can be mitigated by skilled, knowledgeable, and experienced managers who can reduce risk through operational efficiencies.
In private investing, direct investing doesn’t mean the investor does all the work.
It means the investor makes the ultimate investment decisions, which allows them to invest in companies with investment objectives and values that align with those of the investors and offer above-market risk-adjusted returns.