July 27, 2023

JF3248: Should You Invest in Private Equity? | Passive Investor Tips ft. Travis Watts




Passive Investor Tips is a weekly series hosted by full-time passive investor and Best Ever Show host, Travis Watts. In each bite-sized episode, Travis breaks down passive investor topics, simplifying the philosophy and mindset while providing tactical, valuable information on how to be a passive investor.

When you’re trying to grow your net worth and forge a path to success, many people say to mimic the wealthy and successful. Well, most high-net-worth and ultra-high-net-worth individuals have a large portion of their portfolios in private equity. There are a variety of benefits to private equity such as diversification and tax advantages, but is it the right path for you? In this episode, Travis discusses how to make this decision.

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Travis Watts: Welcome back, Best Ever listeners, to another episode of Passive Investor Tips. I'm your host, Travis Watts. In today's episode we're talking about "Should you invest in private equity, like the 1%?" Disclaimers as always, never financial advice; not going to tell you or anyone else what to do, so please always seek licensed financial advice. But   sometimes just learning about what the wealthy do with their money, and simply mimicking their strategy can be a great approach.

Author and speaker Tony Robbins often says "Success leaves clues." And I've been studying the wealthy for a little over a decade at this point, and it's what actually led me to become a passive income investor years ago. So my learning became a reality when I finally met in-person a couple investors that were considered ultra high net worth. And what that means is they had essentially 30 million plus in net worth. In their case it was even higher. So I asked these two gentlemen, I said "What do you invest in primarily?" and their answer was, "Mostly we invest in private equity." Now, private equity can mean a number of things, but the technical definition is a type of alternative investment in which the investors purchase shares in privately held businesses. So we could be talking about real estate, or the business of real estate rather, commercial real estate, or we could be talking about ordinary companies or corporations and owning private shares of those companies. Or we could be talking about venture capital investing, which is startup capital; it's getting companies off the ground. The list goes on and on about what it could mean, but the bottom line is that these companies or these investments are not publicly-traded on a public market, such as companies like Apple or Microsoft, or traded on the stock market.

So an interesting fact - did you know that 90% of US companies are actually privately held, and are not publicly-traded? So if ultra high net worth individuals are investing in private equity, some sources stating as high as 84% of their portfolio - why isn't everybody doing this? And while there's many reasons for this, a few include that many of these offerings are only made available to accredited investors, which is an income and/or net worth calculation threshold that only 10% of Americans meet. Other reasons include just a general lack of financial education, meaning you may not know this is an investment opportunity for you.

Another reason could include that private placements or private equity is often illiquid, because it's not publicly-traded, therefore it may not be a suitable investment for all people. Also, the minimum investment could be rather high. Some of these offerings could start at $50,000 all the way up to a million dollars for a buy-in. And another reason could be that a lot of traditional financial advisors, especially those that work for brokerage firms, may only be able to offer their clients investments that are publicly-traded.

Break: [00:04:41.06]

Travis Watts: So as you can see, the target demographic for the sector is quite limited; in fact, below 10% nationwide, if you think about all the hurdles that we just discussed previously, and that's why you don't see a lot of advertising in this sector or in this space, because quite frankly, most people can't qualify or can't participate in these offerings for one reason or another. But the question is, should you invest in private equity, assuming let's say you're an accredited investor, you meet all the criteria, none of the hurdles that we discussed are barriers for you yourself? Let's talk about it.

So one reason that investors might choose Private Equity versus traditional investments is for a higher potential return. I'm gonna put here on the screen a chart from Cambridge Associates, and it shows a 5-year, 10-year, 15-year and 20-year timeframe, and the overall performance of private equity versus traditional equities. And as you can see, private equity has exceeded the traditional returns in every timeframe. Now, of course, past performance is never indicative of future results, but this is good data to consider.

Another reason investors may look to private equity is simply for diversification. They may not be comfortable having 100% of their portfolio in the publicly-traded markets. As you well know, if we back up to just 2020 to 2023, when we're recording this episode, there's been an awful lot of volatility in the market, lots of ups and downs, lots of fear, lots of uncertainty... Not everybody, myself included, appreciates that aspect of the public markets, so that's yet another reason to look at private equity for lower volatility.

Now, when it comes to real estate specifically, private real estate can offer tax advantages, passive income and potential equity upside in the properties. And frankly, a lot of high net worth individuals are interested in building streams of passive income, reducing their tax bill, and of course, growing their net worth. So this is why I've chose to mimic this subset within private equity, that being real estate.

To me, real estate just has a well-rounded basket of benefits, if you will. Now, that's not to suggest that other types of private equity can't offer the same benefits or some of these benefits... But at the end of the day, you have to do you. My background in investing happens to be real estate, so the more you know about a particular sector or asset type, the more you're setting yourself up for chances of success.

So in conclusion, private equity is forecasted to continue growing in the coming years, which will provide ample investment opportunities for you and I if you so choose to participate in them. Hopefully, you've found some value here, in this episode. You're listening to Passive Investor Tips, right here at Best Ever. I'm your host, Travis Watts. Reach out if you ever have questions or want to connect; you can find me on social media, Travis Watts or @PassiveInvestorTips. Have a Best Ever week, everyone, and we'll see you in the next episode.

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