Author Topic: How to invest in private companies  (Read 623 times)

KateFIRE

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How to invest in private companies
« on: June 24, 2020, 12:14:47 AM »
The number of companies represented in the stock market has shrunk in the last 20 years. I read an article recently about how the stock market is disconnected from the US economy and in the article it said that a big reason is that the stock market is not comprised of the small and mid-size businesses that are hurting in this time. This got me thinking, how do I invest in private companies? Through a hedge fund?

MustacheAndaHalf

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Re: How to invest in private companies
« Reply #1 on: June 24, 2020, 01:40:28 AM »
Private equity is high risk, and requires a very sizable initial investment.  Are you ready to invest $250,000 or $1,000,000 in a single privately held company that will probably go bankrupt?

David Swenson popularized private equity in his book "Unconventional Success", where he describes allocating to both REITs and private equity.  Yale had billions to invest, so spreading million dollar bets around is easy for them, and spreads their risk.  You could read that book (probably available at the library - every college endowment copied Yale after that, the idea was so popular), and maybe look up "accredited investor" to learn about the requirements.

Paul der Krake

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Re: How to invest in private companies
« Reply #2 on: June 24, 2020, 02:01:18 AM »
You become an accredited investor.

chesebert

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Re: How to invest in private companies
« Reply #3 on: June 24, 2020, 02:07:45 AM »
If you have to ask you canít afford it and should not invest.

KateFIRE

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Re: How to invest in private companies
« Reply #4 on: June 24, 2020, 04:40:51 AM »
Thanks for the replies. I guess there hasnít been a Jack Bogle of private equity yet. It isnít accessible to the average person. Thatís too bad because private companies are a bigger portion of the economy than public and this trend is increasing.

ďPublicly traded companies constitute less than 1 percent of all U.S. firms and about one-third of U.S. employment in the non-farm business sector.Ē

@MustacheAndaHalf why do you say that private equity is high risk? Itís not all startups. Iím thinking Dell Computers and Chick-fil-A.
« Last Edit: June 24, 2020, 04:47:39 AM by KateFIRE »

js82

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Re: How to invest in private companies
« Reply #5 on: June 24, 2020, 04:55:41 AM »
Thanks for the replies. I guess there hasnít been a Jack Bogle of private equity yet. It isnít accessible to the average person. Thatís too bad because private companies are a bigger portion of the economy than public and this trend is increasing.

There are a few startups out there that are oriented towards making investments that are traditionally inaccessible(such as private equity) to individual investors, more so.  The basic premise is pooling multiple investors' money towards an investment that would typically require a large amount of funds as an entry point.

Some of these require accredited investor status, as described above.  In some cases they seem to be pretty opaque, which would give me pause - if I'm going to invest in something I need enough information to reassure me that I'm not simply dumping my money into a train wreck where the company's leadership will just take the money and run.

Conceptually, optimizing your portfolio is about maximizing risk-adjusted return - whatever avenue you take make sure you're able to get enough information to make that assessment.  Private equity generally doesn't have the same reporting requirements as publicly-traded companies, which can make this difficult.
« Last Edit: June 24, 2020, 04:57:24 AM by js82 »

KateFIRE

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Re: How to invest in private companies
« Reply #6 on: June 24, 2020, 05:09:47 AM »
Some of these require accredited investor status, as described above.  In some cases they seem to be pretty opaque, which would give me pause - if I'm going to invest in something I need enough information to reassure me that I'm not simply dumping my money into a train wreck where the company's leadership will just take the money and run.

Conceptually, optimizing your portfolio is about maximizing risk-adjusted return - whatever avenue you take make sure you're able to get enough information to make that assessment.  Private equity generally doesn't have the same reporting requirements as publicly-traded companies, which can make this difficult.

Ah yes, I see how the lack of reporting makes it hard to know what you are investing in, thereby increasing the risk.

Iím most likely not going to attempt to invest in private equity unless my own company offered me an opportunity.

It is concerning though on a macro level that the average American can only invest in 1% of US companies. We keep dumping our money, plus the Fedís money, into the 1% of public companies.

bbqbonelesswing

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Re: How to invest in private companies
« Reply #7 on: June 24, 2020, 06:51:46 AM »
You could try investing in some public firms for private equity exposure. Look into Blackstone, KKR, Apollo, etc.; there are many available: https://finviz.com/screener.ashx?v=111&f=ind_assetmanagement

a big reason is that the stock market is not comprised of the small and mid-size businesses that are hurting in this time. This got me thinking, how do I invest in private companies? Through a hedge fund?

If you believe the stock market is outperforming the economy as a whole, why would you want exposure to these businesses you say are hurting?


maizefolk

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Re: How to invest in private companies
« Reply #8 on: June 24, 2020, 07:12:55 AM »
The 1% number is quite misleading as the vast majority of private companies are small businesses: think your local bar or barber. They're really not making a profit, and the owner is likely working 60-80 hour weeks in order to have cashflow.

There there are a growing number of private companies that ARE on the scale of public companies. Many of these are late stage startups that don't want the extra work and loss of secrecy of putting together all the financial reports required of public companies (think Impossible Foods or Palantir Tech). Others are family held enterprises that don't want the loss of control that comes from having outside investors (think Koch Industries or JR Simplot).

TL;DR Most private companies are not anything resembling a business you'd want to invest in. Of the ones you might want to invest in, the majority really don't want your money.

celerystalks

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Re: How to invest in private companies
« Reply #9 on: June 24, 2020, 08:14:47 AM »
Passive capital is in over supplied to small private companies.  There are SBA loans bank lines of credit and lots of investment partnerships and private equity firms hungry for a deal. What is in demand is good ideas for successful businesses.

If you have an idea for a business get started today. Form an LLC, get a loan and possibly sell some of the stock (but retain control).  This will provide you with access to an investment in a small company.. If you question the wisdom of this suggestion and whether you would have the skills, knowledge or time to make a business successful, then how would you be able to assess the business prospects of the private companies you hope to invest in?

MustacheAndaHalf

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Re: How to invest in private companies
« Reply #10 on: June 24, 2020, 09:38:40 AM »
Thanks for the replies. I guess there hasnít been a Jack Bogle of private equity yet. It isnít accessible to the average person. Thatís too bad because private companies are a bigger portion of the economy than public and this trend is increasing.

ďPublicly traded companies constitute less than 1 percent of all U.S. firms and about one-third of U.S. employment in the non-farm business sector.Ē

@MustacheAndaHalf why do you say that private equity is high risk? Itís not all startups. Iím thinking Dell Computers and Chick-fil-A.
https://finance.yahoo.com/quote/DELL/

I doubt you can directly invest in someone else's job, which is why the comparisons you quoted aren't that meaningful to investment.  More relevant is where investment dollars are right now.

According to this article, private equity investments were just under $7 trillion globally in 2019.  Global stock markets hold $70 trillion of investments - an order of magnitude greater.
https://www.economist.com/finance-and-economics/2020/01/30/everyone-now-believes-that-private-markets-are-better-than-public-ones

That article also shows the Yale Endowment is the #1 investor in private equity.  David Swensen has probably forgotten more than most of us know about private equity.  He ran Yale's Endowment, and started their investment in private equity.  Although I don't know enough about it, he does, which is why I recommended his book.

Michael in ABQ

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Re: How to invest in private companies
« Reply #11 on: June 24, 2020, 11:20:05 AM »
I invested in two small businesses in college - both went bankrupt within a couple of years and I lost all my money. This was only a few thousand dollars but the reality is many small businesses won't last more than a few years. The successful mid-market companies that have revenue in the millions or tens of millions are not really interested in a $10,000, or even a $100,000 investment. They can get bank financing and if they want to take on an equity investor, would probably look for someone in their network who could potentially make a large investment. Why take on 20-30 small investors instead of just one. In most cases the only way to get an opportunity to invest in something like that is through networking.

LoanShark

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Re: How to invest in private companies
« Reply #12 on: June 24, 2020, 11:58:04 AM »
You become an accredited investor.

Correct. The minimum is usually $250,000 for a small PE fund. You can also work with independent sponsors on a deal by deal basis. PE isn't really open to retail investors though unless you invest in one of the public funds mentioned in this thread.

Lucky Penny Acres

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Re: How to invest in private companies
« Reply #13 on: June 24, 2020, 08:22:28 PM »
There are some registered closed-end funds that invest into larger private equity funds that provide exposure to private companies. Generally the SEC requires investors in such funds to qualify as accredited investors though.

For example, AMG Pantheon Fund is a registered closed-end fund that invests into a number of private equity funds and strategies. Just looking at their website it looks like the minimum investment is only $25,000, though again accredited investor status is required for that one.

Business Development Companies (BDCs) also offer access to investments in private companies. Many BDCs are publicly-traded so you can buy the shares on the exchange.

Most of these products are fairly high fee compared to equity mutual funds and ETFs and returns can be hit or miss depending if you select a fund with a good manager.