Private equity is not just for millionaires anymore. It can also be an IRA investment option for those who once thought of the asset class as inaccessible.
While some investors look warily at the aging bull market, the private equity category has grown—and continues to grow—in popularity. In fact, this formerly niche asset class appears increasingly mainstream. Global private equity grew from $30 billion in assets in 1995 to $4 trillion today, and Preqin reports that fundraising totaled $595 billion in 2019 alone.
Of course, private equity is a risky asset class, especially for the inexperienced investor. And one of those risks today is COVID-19, which has put a wrench in investors’ plans and in deal fundraising. However, private equity and private equity debt investments have been a tool during economic downturns in the past, and any investor new to private equity should have a conversation with a financial advisor who has insight into navigating these risks.
With that said, how does private equity fit into your IRA?
If you feel maxed out on traditional equities, consider looking in alternative classes as an IRA investment. “[S]ome allocation to private equity can be a good idea—providing risks are measured against the potential rewards,” according to Charles Petrie, managing director of Dolan Capital Group, LLC.
“Private equity opportunities can be accessed through individual retirement accounts such as self-directed IRAs,” says Jeffrey Kelley, senior vice president of Equity Institutional. “The power of a self-directed IRA comes from its almost limitless access to investment options like private equity, real estate, precious metals or other alternative to traditional investment choices.”
(Kelly brings 20 years of experience in financial services operations management. He understands the administrative and custodial challenges of private equity, equity institutional—through equity trust company—and other private investments in IRAs or other qualified retirement accounts.)
Financial advisors and investors alike may really enjoy the idea of investing alongside some of the nation’s leading institutional investors. For those who do their homework, private equity can offer six constructive ways to play a role in retirement planning.
Historically, accredited investors who participated in private equity faced taxation from the IRS. Through a self-directed IRA program, however, investors gain access to the potential benefits of private equity on a tax-advantaged basis. “Investors reap all of the tax advantages that come with investing through a government-sponsored retirement vehicle,” says Kelley.
IRA-minded clients, as well as their advisors, must undertake their own review and analysis of private equity investments. Mr. Kelley noted that while custodians can facilitate investment in private equity opportunities operationally, the law prohibits them from performing any due diligence oversight.
A private equity IRA investment can provide for satisfying returns over time. Of the investors surveyed by Preqin, 68% felt that their PE investments met their expectations in 2019, while another 19% of investors felt that returns exceeded expectations.
Private equity may provide the type of portfolio diversification favored by many of the major pension funds. According to Paul D. McConville, president of Quincy Capital Partners, LLC: “Self-directed IRAs invested in private equity or other alternatives may provide a way for investors to diversify a portfolio beyond traditional equity, bond and mutual fund choices,” said Paul D. McConville, president of Quincy Capital Partners.
“In effect, with a self-directed IRA, investors may gain a wider scope of action for how, when, and where to invest their retirement assets,” continued Mr. McConville.
John C. Bogle, founder of the Vanguard Group, added that “[d]iversification is not only the first important thing investors should think about, but the second and the third, and probably the fourth and fifth, too.”
Traditionally, the U.S. government only allowed accredited investors to invest in private equity. Due to the imminent retirement of millions of baby boomers, many investors may now be eligible for participation in the private equity market.
However, investing in private companies is no longer just for millionaires.
While many traditional private equity opportunities are open only to accredited investors, a growing number of opportunities exist for non-accredited investors. “With approval in 2016 of new rules for equity crowdfunding,” Mr. Kelley continued, “even average investors can invest in some private equity investments with smaller asset amounts. They can also invest in closed-end funds, such as those created through publicly traded private equity stocks known as business development companies (BDCs).”
Many retirement-age individuals accrued a professional lifetime of experience in the very industries that create growth opportunities in private equity. Former employees of companies in technology, consumer goods, financial services, materials and other sectors can apply their own industry insights—with help from trusted advisors—to vet potential IRA investment opportunities.
Many investors prefer to validate their assumptions with advisors and experts. For these investors, there exists a wide variety of online private equity platforms to provide information for those wanting to make an IRA investment.
Additionally, a number of research companies offer comparison and screening tools for investment providers and private equity firms. Investors should always proceed with caution where their money is concerned. “It is also important to consider the qualifications of their custodian,” Mr. Kelley concludes, “to ensure its board of directors, officers and employees all work within a well-established system of internal controls and administrative oversight.”
[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Goal Based Investing – Planning for Key Life Events and PE, VC, and Hedge Funds De-Mystified. This is an updated version of an article originally published on July 26, 2017.]
©All Rights Reserved. May, 2020. DailyDACTM, LLC d/b/a/ Financial PoiseTM
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