Becoming 1 of the 35: Private Equity for the Everyday Investor
I've worked at PENSCO for six years and during that time a lot of deals have crossed my desk. I help clients invest in private equity using their self-directed IRAs, and what I often notice when reviewing deals to see if they are eligible to accept retirement dollars is that they are largely still marketed only to wealthy investors.
A big part of this is due to securities rules, which dictate how sponsors can solicit investors. For instance, if a sponsor wants to engage in “general solicitation” to drum up interest for its offering by advertising, under Rule 506(c) of Regulation D, the sponsor can only raise money from accredited investors. These investors are considered by the Securities and Exchange Commission (SEC) to be sophisticated enough to understand the risks of what they are investing in and to also be wealthy enough to handle potential losses.
A sponsor can raise funds from accredited investors as well as 35 non-accredited investors as long as the sponsor does not use general solicitation or advertising to market securities.
But some securities rules allow non-accredited investors to participate in private offerings. For instance, under Rule 506(b) of Regulation D a sponsor can raise funds from accredited investors as well as 35 non-accredited investors as long as the sponsor does not use general solicitation or advertising to market securities.
What does this allowance for 35 non-accredited investors mean if you are one yourself and you want to use your retirement dollars to invest in a private placement?
As I said earlier, these deals are still largely marketed to accredited investors and getting access to them is difficult. Often, sponsors who raise funds from non-accredited investors do so because those investors are friends or family members. Knowing a sponsor directly -- or being a friend or family member of someone who does -- is still often the best way of finding out about these opportunities.
If you are provided with the chance to participate as a non-accredited investor, it can be an opportunity to diversify your retirement portfolio with an alternative investment. While risky, private equity investments can deliver higher returns than public equity markets. According to data from the Private Equity Growth Capital Council, private equity investments delivered average returns of 14% in the 10 years ending in 2013, compared with 7.4% for the S&P500.
Investing in private equity can also be a good match for retirement funds. The dollars you put in your IRA tend to be those with a long investment horizon, which match the longer holding periods required of many private equity investments.
But keep in mind that a robust amount of due diligence should be conducted before investing in a private placement. The SEC says you can participate in one of these deals as a non-accredited investor as long as you or a purchasing representative you work with are “sophisticated,” which means you have sufficient knowledge and experience to be capable of evaluating the merits and the risks of an investment.
At PENSCO, we review deals for administrative feasibility only, meaning we determine whether an asset can be held in a tax-advantaged retirement account. We do not review the merits of the deal and we cannot offer investment advice. We also do not track how many non-accredited investors are participating in an offering.
If you are considering a private equity deal, it's best to consult with a trusted financial professional who can help you assess the deal's risks and determine whether it meets your long-term investment goals. You should also vet the sponsor to make sure it is one you are comfortable investing with and one that will be diligent about following securities rules when it comes to allowing non-accredited investors in their offering.
The world of private equity is always shifting, so if you have questions on investing in private equity using your retirement dollars, please reach out to us or let us know in the comments section below.
PENSCO employees’ participation on this podcast (or any other) is purely for educational purposes. PENSCO does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Individuals are encouraged to seek professional advice before making any investment decision. Investments are not FDIC insured and are subject to risk, including the loss of principal.