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Investing In Your First Private Placement 

Everyone’s looking for one key or another that will unlock the door to any of a variety of human pursuits:  happiness, long life, weight loss, and riches.

Many will search their entire lives and not find the keys they’re looking for – for whatever reason. The keys may be elusive. They may be unrealistic. For those seeking financial independence, look no further. I will reveal the key that the ultra-wealthy have been using for decades to unlock wealth. Stay with me.

While the rest of the country goes gaga over Wall Street and Bitcoin, other investors place their capital elsewhere. They seek out opportunities in the private markets where companies raise capital to fund their business ventures and real asset acquisitions.

In the stock market, when a new company wants to raise capital, they launch an IPO, making their stock available for sale to the public for the first time. Anyone with a trading account can buy public stock.

For many companies, going public is a time-consuming and expensive endeavor. That’s why the SEC has carved out a niche for companies to raise money without having to go through the expensive IPO process.

​​The SEC allows companies to rely on so-called private offering exemptions to raise capital – provided certain requirements are met. In most cases, a company will rely on the exemptions provided under Rule 506 of Reg. D in connection with their private offerings.

Whereas in the public markets, companies conduct IPOs – a process known as going public – to raise capital; in the private markets, companies conduct private placements to raise capital.

Why Invest In Private Placements? ​

Why are private placements a big deal? Because it’s the big secret of how many ultra-high-net-worth individuals (UHNWIs) created their wealth.

​​It’s how Ivy League university endowments like Harvard and Yale can generate annual returns of at least 10% every single year to fund their universities and to preserve funds for the future. These universities are only in this position because they’re heavily allocated to private investments with very low allocations to public equities.

Restricted from advertising or general solicitation, private placements used to be only available to the wealthy and connected. But with recent developments and amendments to the securities laws and regulations by the SEC, the advertising rules have been relaxed – provided certain requirements are met – making private placements available to more qualified investors than ever before.

​​Private placements are no longer just the realm of just the ultra-wealthy or connected.

The SEC is now handing the keys to investors who were traditionally locked out from private investments to generate the wealth elite investors have enjoyed for decades.​​

Why has the SEC been making strides to make private placements more available to more investors – the result of which is more capital is now raised through private placements than IPOs? Because, based on their research, private investments can provide better returns than the public markets.

Besides above-market returns, private investments offer other advantages public equities don’t, including:

  • Income (i.e., cash flow).
  • Growth (i.e., appreciation).
  • Shielded from volatility (i.e., non-correlation to Wall Street).
  • Hedge against inflation.

Private placements may indeed be more susceptible to risk than other investments but that risk is typically tied to the business risk involved with inexperienced managers and operators.

​​This risk can be mitigated significantly in the hands of experienced and skilled management with a sterling track record. In fact, according to a recent McKinsey report, private placements offer the opportunity to generate returns well beyond those offered by public offerings like mutual funds – in the right hands.

Who Can Invest? 

Over 90% of private placements allow only investors who qualify as Accredited Investors. An investor is considered “Accredited” if they meet certain income ($200,000/yr. for the past two years or $300,000 with their spouse) and net worth ($1 million not including primary residence) qualifications. Being Accredited implies the investor has the knowledge, experience, and capital required to make prudent investment decisions and to withstand a potential loss of the investment.

Why Avoid Wall Street?​

On the surface, Wall Street seems to be booming, but below the surface, it’s chaos – a wild west not tied to any basic economic fundamentals where share prices can be disrupted and manipulated by high volume traders and Reddit chat rooms.

​​The stock market is treading dangerous territory fueled by pandemic-induced factors like unemployment, free trading, and stimulus checks.

Who Are Private Placements For?​

Private placements are for investors with a long view – willing to surrender liquidity to avoid market volatility and manipulation to generate wealth like the ultra-wealthy.

Building wealth relies on a variety of factors – not just one – that have been time tested by the ultra-wealthy for decades.

​​Unlike the speculation on Wall Street, private placements offer the security of real assets, the reliability of cash flow, and the sustainability of growth – all essential for building and compounding wealth.

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