<img height="1" width="1" style="display:none" src="https://www.facebook.com/tr?id=533208126839177&amp;ev=PageView&amp;noscript=1">

5 Misconceptions about Investments in Private Securities

Post on: March 22, 2018 | Mat Dellorso | 1

Unposed group of creative business people in an open concept office brainstorming their next project..jpeg

Private securities investments are inherently more risky, subject to restrictions, have longer hold periods, and higher fees than publicly traded stocks and bonds.

However, as we covered in 3 Reasons Advisors Shouldn't Recommend Alternative Investments to Their Clients (and 3 Reasons Why They Should), investors who can take on those risks can diversify their portfolios, limit correlation, and access attractive risk adjusted returns by allocating to vetted private investments.

Below are a few general perceptions advisors have toward private placements  and some examples of how these can be common misconceptions:

1. Private Placements are Illiquid

Private securities are restricted from trade and transfer for at least a period of 6 months. However, there are marketplace platforms that offer a venue to sell certain secondary securities such as in non-traded REITS and private funds from other limited partners and investors. 

2. Long Hold Periods

Some private placements offer redemptions, or provide regular distributions and have short term demonstrated maturities. For example, based on our experience in the litigation finance sector, some cases close in less than 6 months and according to a 2015 study by the National Center for State Courts and the State Justice Institute, the average civil case in the US state courts closes in just 10 months. This may be long term when it comes to the liquid market of registered securities and the overall bond market, but not the 5-7 years (assuming they close at all) typically assumed when investing in many private securities.

3. Large Minimums

You do not have to invest $500k a ticket to get access to funds and opportunities. Through feeder funds and efficient processing technology, the minimums on some unique opportunities can be less than $100k, letting someone with a modest portfolio invest across several private investments to spread risk and broaden exposure.

4. Reporting/Custodial Issues

A common question that comes up about private investments is, “If it’s not listed on a major custodian like Schwab or Fidelity, how do I charge for it and get pricing information?” As an advisor, you can direct your custodian to hold the assets, as many custodial platforms will accept private placements. Alternatively, you can use a third-party custodian, such as Pensco, to custody the investment. Many advisory systems also have a way to enter a private security trade “below the line” and update pricing information as the issuer sends in K1’s or updated financial performance information. Private investment sponsors with best practice corporate governance will provide updates to investors quarterly and formal reporting information annually.

5. High Fees

Private fund managers and sponsors of private placements often charge a management fee and a percentage of carry. Additionally, for some products, there may be a broker-dealer commission or other asset acquisition or disposition fees. All of these can range widely across products. Nevertheless, this incentive performance structure can produce attractive, risk-adjusted returns.

Not every private placement has the same characteristics for each of the investment factors discussed. These investments can be very different in structure along these diligence characteristics. That is why it is very important to understand what you are investing in and what is suitable for your own preferences and portfolio.


Alternative Investments and Technology Adoption for RIAs

Are you keeping up with the latest trends in financial advising? Download our E-book to 
discover opportunities to gain a competitive advantage in a rapidly changing market.


Disclaimer: WealthForge provides this information to our clients and other friends for educational purposes only. It should not be construed or relied upon as legal advice. Private securities offerings may have a long holding period, be illiquid, and contain a high degree of risk. Investors must be able to afford the loss of all of their principal. Illustrative proforma results may significantly differ from actual outcomes. Past performance does not indicate future results. 

Disclaimer: Altigo provides this information for educational purposes only. It should not be construed or relied upon as legal or tax advice.

About author

Mat Dellorso

Mat helps drive WealthForge's vision forward with his passion for innovation and background in entrepreneurship. Mat helps lead company strategy and growth and is a frequent industry speaker on how WealthForge is powering the future of private capital markets.
Find me on:

Related articles