top of page
  • Writer's pictureEiger

The Pros and Cons of Private Investments

The markets are pretty volatile right now. Major banks are going under and finding sound investments is a difficult proposition. What about private investments, though? Can you generate better returns in the private space than you can in the public markets? Like any type of investment, there are pros and cons. And private investments cover a broad range of opportunities—such as real estate, private equity, private credit, and hedge fund strategies—with varying levels of risk.


Pro: High Returns


Private investments typically target higher returns than their public counterparts. The average returns on private investments, like private equity and private credit, have been higher than they’ve been in public trading. Over the course of the last 20 years, private equity has seen, on average, returns of over 10%. But remember, past performance is no guarantee of future results.


Con: High Risk


Any investment carries some degree of risk, and when the rewards are higher, the risks are as well. Private equity, for example, includes investments in startups and other fledgling untested businesses. Your profit depends on whether or not they are successful, and many are not. In fact, 90% of startups fail.


Of course, not all private investments are in startups. But risks other than bankruptcy exist in any private placement. Because private investments tend to have more flexibility in their investment strategies, they also have less oversight by regulators. As a consequence, there is a higher risk for fraud.


Pro: Less Volatility


Depending on how and when you invest, many private investments can offer a stable alternative during volatile periods in the market. Real estate, in particular, while it certainly has had its volatile periods, is typically a good long-term investment. One reason why private investments can be less volatile is because the manager has the flexibility to hold and stay invested when others panic and want to sell. Panicking investors can force managers of public investments to sell and lock in losses at the worst possible time.


Con: Less Liquidity


Since private investments do tend to be more stable long-term, it makes them less liquid for fast cash in a pinch. Instead, you typically have a commitment to a certain investment term, anywhere from a few months to a few years to a decade or more. Trying to sell before the period is up can result in high costs or may even be impossible.


Pro: Control


If you’re a stockholder in a public company, you get a certain amount of voting power with regards to major decisions. However, chances are, you’re just one of hundreds of thousands of other investors, and your vote doesn’t count for much.


With a private investment, you may have the opportunity to take a more hands on approach. Depending on the size of your investment, you may be able to offer guidance to an up and coming small business or weigh in with real influence on important decisions. You may also have easier access to the decision makers.


Con: Wealth Barrier


In a stock exchange, you can take a few hundred or a few thousand dollars and buy a few shares of a company. If you want, you can even buy a single share for a few dollars depending on the share price. Your stake in the company isn’t much and your returns may be minimal, but the opportunity is there.


Private investments tend to require a much larger sum. There’s often a minimum investment, which can be a hundred thousand dollars or even a few million. What this means for you is that there exist fewer opportunities if you’re not already wealthy.


Fortunately, there is an alternative. A variety of types of investment funds pool the capital of several different investors to meet the minimum buy-in amount. There may still be a minimum buy-in, but it’s more likely to be around $10,000 rather than $100,000. Minimums have also been reduced with the emergence of interval funds, tender offer funds, and other fund structures that accommodate smaller investment amounts.


Pro: Flexibility


There are all different types of private investments, and all different ways that you can invest. For one thing, you may be able to choose an investment company’s stage of growth. Do you want to provide seed money to help turn a good idea into a working company? Development money to help get that fledgling company going? Expansion money to help take an established company to the next level? Or do you want to do a buyout of an already established and successful company?


You can also invest in private credit. Instead of owning a stake in the company, you provide them with a loan. In return, you get repayments with interest. Depending on the circumstances, it can have a higher yield potential than private equity. There’s also real estate and other appreciating assets that provide alternatives to the stock market. Within real estate, you can choose between industrial, commercial, residential, raw land, and so forth.


Whatever you’re looking to do, there are private investment options that will meet your needs.


Con: Less Transparency


Public markets are highly regulated, which can limit your options but also mitigates your risk. In private investments, there’s often less transparency with regards to where, specifically, your money is going and what it’s being used for. This can in turn make it difficult to know your likelihood of seeing a decent return on your investment. There are some rules that help regulate private investments, but not as many as with public ones.


At Eiger Wealth Management, we can help you find the best private investments and private investment funds to meet your needs. We’ll help you navigate the ins and outs of due diligence and risk management to put your money in the place where it will have the best chance of success and provide you with what you’re looking for.


Contact us to learn more!


The information contained on this site may not reflect current developments; does not constitute investment, tax, or legal advice; and should not be relied upon for such purposes. There is no guarantee that any forecasts made will come to pass. We make no representation about the accuracy of the information or its appropriateness for any given situation. This information is not an offering. Past performance does not guarantee future results.

Comments


bottom of page