For Better or Worse, Passive Investing in Private Markets is Turning Mainstream

Welcome to iPrivateMarkets.com, your go-to destination for all things related to private market investing. Whether you are an accredited investor or just starting out, our aim is to provide you with valuable insights and guidance to help you navigate the world of private markets and build a more secure source of passive income and long-term wealth.

What sets us apart from other resources in this field is our commitment to building a community of investors, by investors, and for investors. We are not here to promote any specific real estate syndications or private equity opportunities. Instead, our focus is on what we call "private-passive" investing, a unique approach that distinguishes itself in the investing landscape. Figure 1 illustrates the focus of this resource.

The goal is to empower private investors with the knowledge and tools you need to make informed investment decisions in the private markets, decisions that are consistent with personal needs and risk tolerance. Whether you are looking to diversify your portfolio, explore alternative investment options, or simply learn more about this fascinating field, you have come to the right place.

So, stick around, explore our blog, and join our growing community of like-minded investors. Together, we will unlock the potential of private market investing and work towards a more financially secure future.

Absolutely, it is fascinating to see how the investment landscape is evolving, especially with the increasing shift from public markets to private markets. This transition has been gaining momentum for assorted reasons. The wealth gap is wide and growing, with increased impetus for governments to level the playing field by providing more access to private investing opportunities, historically accessible only by the rich. While most opportunities are only available to accredited investors, the ranks of investors with access to private market investments are increasing.  Crowdfunding and unique digital platforms has enabled non-accredited investors access to similar private opportunities.

The democratization of investing is happening, and investors need tools and frameworks to help them navigate private markets.

Private asset classes such as private equity, private debt and commercial real estate have historically been the playground of the wealthy elite. Private markets are massive in size and continue to grow rapidly. Per the regulatory framework in the United States, investors in private offerings must satisfy the definition of an accredited investor which is primarily a function of a household’s net worth or annual income. The Securities and Exchange Commission (SEC) is responsible for regulating and modernizing the accredited investor framework with the primary mission of protecting investors from bad actors and the general lack of required disclosures related to private securities offerings.

The heavy reliance on financial criteria to define an accredited investor sidesteps the desire to protect investors, and instead justifies its framework by proclaiming that the wealthy are in a better position to withstand losses in private markets. The affluent have unfair advantages because they have unfettered access to private markets, and non-accredited investors are mostly locked out of these potentially lucrative opportunities based solely on their lack of income or net worth. Approximately 13% of households currently satisfy the definition of accredited investors, and only a small fraction of those households actually invests in private deals.

However, forces are colliding that are changing the conditions on the playing field of private market investing. First, the ranks of accredited investors are growing each year due to actions and certain inactions of the SEC making it easier to qualify. It is important to protect investors, but government has a vested interest in growing the economy through small businesses having access to capital for growth.   With the unprecedented increase in interest rates during 2022 and 2023, bank lending has become increasingly restrictive thus opening the doors for other sources of private debt and equity to fill the gap.

Additionally, as the Baby Boomer Generation enters its final act there will be massive wealth transfers to beneficiaries which will further increase the population of accredited investors. The demand side of the equation is also rising due to the forces of crowdfunding, technology, and fintech innovations enabled by SEC exceptions to the accredited investor standards.

Demand is a function of availability and accessibility. For example, ten years ago an investor had to go directly to sponsors of private offerings to get access. With crowdfunding sites, investors can now access a multitude of real estate or private equity offerings in one place which fuels interest in these markets and can be useful for investor education. On top of this, frameworks and options are expanding for non-accredited investors to participate in private markets which will further solidify the demand. No longer do investors have to be anointed as wealthy to participate, but more work still remains to further democratize investing opportunities in private markets. Investors that ignore the private markets are missing out on a large universe of opportunities to diversify and grow their wealth and achieve a decent retirement.

Private-passive investing can help investors earn consistently higher returns and achieve greater diversification than by simply investing in index funds in public markets. Private markets act differently than public market investments, and the lack of correlation can help generate higher risk-adjusted returns. Stated another way, private-passive investing instruments represent an additional tool  used to replace or supplement a paycheck. Investors in private markets share the goals of generating reliable streams of passive income and building wealth over the long-term. However, investing in private markets requires a different mindset and capital management technique as compared to investing in very liquid public markets.

Legal and regulatory professionals will argue that the recent proliferation of alternative investing platforms and crowdfunding are dangerous, and that regulatory conditions should become more restrictive. Surely, Wall Street is biased and prefers the status quo. On one hand, liberalizing conditions for investing in private markets solves the problem of the unequal playing field for wealthy investors and everyone else. Democratizing access to proven access classes is a worthy long-term goal.

Private market investing can indeed play a crucial role in addressing the retirement crisis that many Americans are facing. The challenges surrounding retirement preparedness are multifaceted, and exploring private market opportunities can be a strategic move. Allocating a portion of retirement assets to private markets allows for the promise of higher returns, less volatility and greater diversification for the overall portfolio, increased control over the assets, and an enhanced ability to tailor the portfolio to your overall goals. For these reasons, private market strategies can help bridge the retirement gap for many individuals.

Increasingly, individuals are also looking for supplemental income that can help them achieve financial freedom or simply to plug a hole in their budgets. A private investment, passive income approach can assist these households in filling the gap between income and expenses. The problem is that investors require preparation and education in order to be ready to expand their portfolios to include private assets as accessibility to private offerings inevitably increases in the future.

There is little question that private markets will continue to grow, and households will have access to new types of private offerings even if they do not qualify as an accredited investor. What risks or problems does this create? The risk is a significant loss of capital when combining the temptation of higher returns with a shortfall of investor skills and education, investing fundamentals and planning frameworks for private markets.

There are vast quantities of knowledge resources and best practices for investors navigating public markets – stocks, bonds, and mutual funds. The more investors seek the advantages of investing in private equity and debt, the conditions will expand and flourish for individual investors to be taken advantage of. There will be money lost on new platforms that promise strong returns, but behind the scenes are doing nothing to protect investors against basic credit or investment risks. This is the other side of the coin.

The have recently been well publicized instances of investors losing money on “crowdfunding” sites, most notably the Crowdstreet debacle with The Nightingale Group. An element of trust is required to invest in any market, public or private, but there are unique risks involved with investing in private market offerings. As this is the introductory blog for iPrivate Markets, deeper discussion around the Nightingale Group debacle (or theft) will be covered in separate blogs. Suffice it to say that criminal or fraudulent activity is quite difficult to prevent if this is the mindset of an offering sponsor at any particular point in history.

In short, private markets can be extremely dangerous (as can public markets) so investors need insights and frameworks to potentially avoid or manage these risks. It would be quite easy to say, please “stay away from investing in private markets!”  The reality is that the explosion of opportunities on the supply side of private markets coupled with looser regulation will entice and entrap individual investors at some point. It seems unavoidable. Accordingly, iPrivateMarkets strives to be a resource to guide investors towards prudent frameworks while avoiding obvious pitfalls.

What are potential solutions that can address the obvious pitfalls of private market investing? The solution to this problem is not simply to discredit private investments, and that all sponsors and platforms that provide access to investors are bad actors and scam artists. This is not a problem unique to traditional private markets. The SEC framework needs to continue to modernize, and adapt to changes in modern culture, modifying accreditation standards to be based on investing acumen and not simply wealth, and changes driven by technology.

Crowdfunding, a general term that covers many modern technology platforms including pure crowdfunding sites as well as marketplaces for syndication offerings, regulations have been improved and will continue to seek more investor protections. Crowdfunding platforms must take the lead in providing more transparency with offerings, including transparency with their filtering or due diligence processes, otherwise risk being replaced by competing platforms. In addition, they must truly advocate for their customers when issues arise with large and powerful sponsors. Of course, educational resources must be developed around private markets, including how to navigate, evaluate, and allocate capital to private asset classes, sponsors, and their specific offerings. Basically, how can crowdfunding be improved to engender investor trust in the future?

Another component to successfully managing a private market portfolio is proper advance strategic planning. How much of an overall portfolio should be allocated to private markets relative to public markets? David Swensen was the President and Chief Investment Officer of the Yale University endowment, and he achieved fame by transitioning the endowment of Yale from primarily a “60/40” type public market portfolio to an allocation consisting almost entirely of private market alternatives over a period of decades.

Can individuals take a similar road over time with the right education and mindset? Likely not, but then again, individuals as a whole are not terribly successful managing portfolios of public market securities either. It is all relative.

Portfolio construction, allocation, and constraints are all important considerations when building a private market portfolio, and these parameters will be unique for each investor. Accredited investors are not a homogenous group. All differ in terms of age, risk tolerance, need for income versus growth, and optimal asset allocation. The needs of a 35-year-old recently minted accredited Investor that is attempting to replace a W-2 paycheck with passive income are different from an investor with a $50 million net worth.

Navigating the maze of private offerings for investors can be overwhelming and flat out dangerous. This book targets those who are or expect to be accredited investors during their lifetime, as well as non-accredited investors wishing to gain education and experience in private markets through innovative crowdfunding platforms. It is about facing the expansive menu of private investment options in a responsible way. The ranks of accredited investors are growing every day, and individuals may not even be aware that they are accredited. The overwhelming majority of investors that qualify as “accredited” do not invest in private markets at all. Such investors are unaware of the opportunities in private markets or are frankly only plain scared.

A vast library of literature has been published about portfolio allocation for traditional equity and fixed income portfolios. This blog will address these best practices, and how can we apply  proven investment and wealth building principles when the menu of investment alternatives is expanded to include private investments? It is the difference between the menu at In-N-Out Burger versus The Cheesecake Factory. My intent is to investigate, along with this community, a basic framework for optimizing portfolios consistent with investors’ need for cash flow and overall investment objectives. It does not discard the tried-and-true rules for building wealth in public markets, but in fact embraces these rules to apply to private markets.

Development of proper mindset when investing in private markets is also a critical factor to explore. The value of patience, a long-term time horizon, dealing with issues of illiquidity and leverage, and not succumbing to the “next shiny object” syndrome are examples of topics to explore.

Throughout my W-2 career, I have had exposure to all types of investments, public and private. My career commenced as a Certified Public Accountant, cutting my teeth during the savings and loan crisis, seeing firsthand the dangers of investing in real estate. My duties later evolved into the role of treasurer for a private company, CFO for a global private company, and finally as a CEO for a not-for-profit with a large investment fund. In addition to the obvious responsibility for managing the investments of these organizations, mergers and acquisitions were a dominant theme with all of these organizations. Acquisitions are essentially an exercise in private equity. Buying real businesses, fixing them up for higher profits in order to improve the combined enterprise or to sell businesses at a higher price down the road. Large private equity firms are vilified in the press for being short-term oriented, laying off excessive number of employees, and being generally focused only on investment returns. The reality is that this is a basic playbook of public and private businesses alike. Growth, progress, and efficiency are essential features of capitalism, and buyouts are a necessary tool for long-term survival.

On the personal side, I was fortunate enough to accumulate a degree of prosperity during my 35+ year career within both qualified retirement plans and taxable brokerage accounts. I allocated all investable assets into the stock market, public bonds, and mutual funds, with the majority of them in qualified retirement plans in which investment options were limited. The advent of crowdfunding for offerings in private equity and real estate first caught my eye in 2017. This was exciting and leveraged my experience in analyzing business opportunities, but I had no framework or plan in developing a private asset allocation and how to prioritize the types of investments that I wanted to acquire. It did not go well initially, and my hope is that others can learn from my mistakes.

I invested in single business startups and lost. Acquired limited partner interests in venture capital funds from strong sponsors and won. Next, I expanded into commercial real syndications and found a rich universe of offerings that were diverse enough to build a portfolio that met my financial needs – income, growth, or a combination thereof. Education, experience, and capital allocation were the keys to successful investing in my case. Today, like it or not, private offerings are available to all investors – everyone requires skills and education around private markets.

My goal is to further the learning process for the private-passive community and to help them from making the same mistakes I have made during my lifetime. Public or private investing should not be a casino. Investors require resources to guide their inevitable, expansive journey into private offerings. They require a basic understanding and frameworks with regard to how they allocate capital in order to thrive with a passive approach to private market investing.

In summary, iPrivate Markets is intended to be for content by investors and for investors that want to learn about and diversify into the private market (alternative) asset classes, utilizing a passive approach to income and capital appreciation generation. We are not selling investment opportunities, which is the primary objective for most books or online resources on the topics of commercial real estate or private equity. This will ideally be a community of private market investors to learn and collaborate to improve skills with the goal of building long-term wealth in private markets. Private markets should not be navigated alone – the experiences of others will be critical in developing the next generation of passive investors in private markets.

I look forward to collaborating with all stakeholders operating in the private market sector moving forward.