Investing in private markets is one way to diversify your investment portfolio and potentially earn returns. However, it can also be more complex and riskier than investing in publicly traded companies. In this beginner’s guide, we’ll take a look at what private markets are, the different types of private market investments, and how to get started investing in them.
What are Private Markets?
Private markets refer to investments in companies that are not publicly traded on a stock exchange.
These companies are typically owned and controlled by a small group of investors or a single individual, rather than by the general public. Private market investments can include things like venture capital and private equity.
⇒ Venture Capital
One of the most popular types of private market investment is venture capital. Venture capital firms help provide funding to startup companies with the potential for growth. In exchange for their investment, venture capitalists typically receive equity in the company and may also have a seat on the company’s board of directors. This type of investment can be risky, as many startup companies fail, but it also has the potential for growth if the company is successful.
⇒ Private Equity
Another type of private market investment is private equity. Private equity firms invest in mature, private companies that may be looking for growth capital, a buyout, or to restructure their operations. Similar to venture capital, private equity firms typically receive equity in the company and may also have a say in how the company is run.
It is important to note that most private market investments are only available to accredited investors as defined by the Securities and Exchange Commission (SEC). An accredited investor is someone who has a net worth of at least $1 million, exclusive of their primary residence, or an annual income of at least $200,000 for the past two years (or $300,000 combined income if married) and has the expectation of earning the same amount the current year[1].
How to Get Started
⇒ Invest Directly in a Private Company
One way to invest in private markets is to invest directly in a private company. This can be done through an investment platform, like MicroVentures, which allows individual investors to contribute small amounts of money to a private company’s funding round.
⇒ Invest in a Venture Capital or Private Equity Fund
Another way to get started investing in private markets is to invest in a venture capital or private equity fund, which pools money from many investors to fund a variety of companies. This can be a more accessible way to invest in private markets, as the fund manager will handle the process of finding and vetting companies to invest in. Similarly, many of these types of funds are typically only available to accredited investors.
Final Thoughts
Overall, investing in private markets can be a way to diversify your investment portfolio and potentially earn returns. However, it’s important to understand that these types of investments are generally higher risk and can be more complex than investing in publicly traded companies. If you’re considering investing in private markets, it’s important to do your research and you may want to consider working with a financial advisor who has experience with these types of investments.
It is also important to note that private market investments are illiquid, meaning it can take longer to cash out your investment. It can also be difficult to value investments in private companies, as they do not have the same level of financial transparency as publicly traded companies.
In conclusion, private markets have different opportunities and characteristics than public markets, both in terms of risk and return. It is important to understand these and also understand the different options of investment types and opportunities available. As with any investment, it’s crucial to be well informed, do your research, and consider working with an experienced professionals before making a decision.
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[1] https://help.microventures.com/hc/en-us/articles/360030390751-Accredited-Investor#:~:text=You%20are%20an%20accredited%20investor,the%20person’s%20primary%20residence)%3B
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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.
