🍾 The private party

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If you have two thumbs, a functioning brain and a wallet, you’ve probably been pitched a private investment sometime in your life.

Your cousin raved about getting access to SpaceX before the IPO? Private investment!

Your buddy asked you to buy into his pizza joint? Private investment!

Your sister pitched you a structured note that promises decent returns with limited downside? Private investment!

Private assets have ballooned in popularity over the past decade, mainly because Wall Street itself has turned private. The number of public companies has been cut in half over the last 30 years, and borrowers have turned to alternative channels for financing as banks have pulled back on lending.

Blame it on the global financial crisis, stricter bank laws and ultra-low interest rates. Private status has become a badge of honor, with companies like OpenAI, Anthropic and Anduril opting to stay private for years.

At The Compound Insights, we wanted to understand the adoption of alternatives among financial advisors. So we partnered with CION Investments and YCharts to learn which private and alternative assets they’re using, where they’re seeing growth and how they’re helping clients navigate the space.

You can read our findings here, or register for our webinar on July 29 to learn more about private asset strategies in wealth management.

Many of you reading this newsletter, however, don’t care about RIA investment platforms.

You just want to know if you should listen to your cousin, buddy or sister and take the plunge into private investments.

My answer: like most things, it’s complicated.

Private investments are often touted as the last bastion of edge on Wall Street. A seat at the table before those ol’ regular people can join in on the millions of businesses that never hit the stock exchanges.

Those statements have a grain of truth to them, but they’re often wildly overrated. Private businesses may make up the majority of corporate America, but not every business is investable (or worth investing in). Early, exclusive access doesn’t guarantee success.

As for the edge, well…I’ll let the returns speak for themselves.

Decent, but not the barn-burning winners people make them out to be. 

I’m not a total hater. I’ll give you the pros and cons for anything, as a good analyst should.

Investments outside of public stocks, bonds and cash can serve a purpose in the right portfolio.

Real assets could be an attractive counterbalance to traditional investments in a high-inflation environment. Structured solutions like buffer ETFs  and specialized notes could help provide more defined outcomes for specific needs. The next Uber, Airbnb or Stripe may be right in front of your nose.

If you have a desire and discretionary cash to burn, who am I to tell you what to do?

You have to be careful, though. There’s a LOT of slop in private investments, and the slop managers will charge you egregiously high fees for a sloppy piece of the slop pie.

So how do you sort through the slop?

It’s incredibly hard. Firms have entire armies of research teams dedicated to finding diamonds in the private rough.

But if you’re determined, I have a few starter tips for you:

Understand your why. People love the thought of a private moonshot, but many investors can’t handle it (nor do they need it!). The S&P 500 has returned an average of 8% annually since 1950, and gains can snowball over time.

Know where you stand. As an investor, you have rights. You sit somewhere on the capital table, and that somewhere could dictate how much money you make (or even if you can recoup your original investment).

Research your manager. Manager selection is everything for private equity and credit funds. Fund managers are responsible for sourcing the private deals you’re invested in, and deal selection determines your returns.

The numbers on top are the best annual returns, while the numbers on the bottom are the worst. Quite the spread, eh?

Also, if you pick the wrong manager, you’re likely stuck with them for a while. You can’t just sell your stake immediately like you would with a public stock.

Be realistic about your odds. Early-stage company investing hinges on the power law – or the recognition that only a handful of investments are successful, and their returns are often an order of magnitude larger. Venture capitalists make a multitude of investments to find that one home run. Chances are you won’t hit that home run on your first at bat.

Learn the intricacies. Private investments behave differently from public investments. There are capital calls, complex structures and lots of opacity. There are semi-liquid private opportunities and public vehicles that are easier to navigate. But what you gain in accessibility and transparency is often lost in deal selection and returns. It’s all about tradeoffs.

Thanks for reading!

Callie

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