Smart Investing

Private equity opportunities rise in high-net-worth sector

Key Points
  • Advisor Matt Chancey sees private investment options increasing because they are becoming more attractive, accessible, transparent and "niche."
  • Benefits over traditional equity and fixed-income investments include lack of liquidity, potentially tax-advantaged returns and lower volatility, according to Chancey.
  • Private equity opportunities have been growing within the socially responsible investment sector.

Access to private plays for accredited investors have increased in recent years, and some financial advisors are using this as a point of differentiation for their practices.

Bernd Vogel | Getty Images

"This is just the beginning," said Eric Mancini, certified financial planner and wealth advisor with Traphagen Financial Group. "It's only in the last couple of years we're seeing any sustained push from [private equity] companies."

In fact, according to Bloomberg, "private equity is trying to cut out the middleman — namely, the brokers at big money-management units at large banks [and] … could potentially automate a lot of the paperwork and tax documentation."

Mancini sees it as a growing trend for several reasons, such as emerging technology platforms that facilitate the extensive paperwork, client tracking and communication specific to private investments. In addition, there is greater interest from advisors due to anticipated low returns from public investments and concerns about valuations, and private equity companies are now starting to understand how to package deals for accredited retail clients.

Private equity is an area of specialty for Matt Chancey, a CFP affiliated with the Clariphi Advisory Network. He also sees private investment options increasing and says some of the reasons are due to the fact that they are more:

  • Attractive. As competition grows, companies are putting deals together to benefit the investors — for example, giving a higher share of profits.
  • Accessible. Minimum investment levels are dropping, sometimes to as low as $25,000.
  • Transparent. Ownership partners are putting in their own money, with higher-quality management teams.
  • Niche. Deals are more sector-specific (e.g., fast food, auto dealers, IT services, waste management), resulting in more and smaller transactions.

"There are risks, and it's important to understand each deal before committing client capital," Chancey said. "But with appropriate position sizing and diversification across multiple deals, it's a benefit to many investors."

He cites the benefits over traditional equity and fixed-income investments as lack of liquidity, which keeps investors committed to the planning; enhanced return stream; potentially tax-advantaged returns; and lower volatility, because private equity does not trade in the liquid markets.

Chancey sees his expertise in private investing as a differentiator for attracting new clients.

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Similarly, private investment is a key component of LotusGroup Advisors' investment strategy, according to Andy Seth, founding partner. The practice has executed 484 individual placements in the past five years.

Seth sees private equity as an important tool for generating cash flow, averaging $70,000 per year per client.

"Our selection criteria currently include only recession-resilient deals, such as mobile homes, affordable housing or skilled nursing facilities," he said. "The deals are 'stacked,' and we educate and encourage all our [eligible] clients to make at least five private investments within two years of onboarding."

Seth's practice has a particularly high level of expertise in due diligence because of his in-house team of four, who just source private equity deals. "The work is very resource intense — there's way more work in sourcing," he said. "As a result, we are able to find valuations that are 50 percent less than in the public markets."

This is because the public markets have a larger demand for shares, which increases their value, he said. In contrast, the private markets have less accredited funding available, which means companies need to make their shares cheaper, with higher returns.

Private equity opportunities have also been growing within the socially responsible investment sector.

"Over the last five years, the number of 'green' private equity deals has increased by two or three times," said Andy Loving, CFP with Just Money Advisors. "We have more options as the demand for social investing in general has increased."

Examples of deals he has worked with are sustainable timber, using conservation easements and new market tax credits to add the return; and a renewable energy deal that had an unusually low entry minimum of $25,000.

Loving sees private equity becoming more accessible, with some deals open to non-accredited investors.

"The companies are now allowing us to aggregate investors, which encourages more diverse investors," he said. "Starting from a $250,000 minimum, it can go down to a $50,000 minimum because they're willing to work with firms who can bring them at least $1 million by combining with other RIA members."

These investments need to be exercised with caution, because private investment has inefficient pricing and you could miss out on liquidity and day-to-day pricing.
Shane Yonston
principal advisor with Impact Investors

In the past, private equity companies looked to people with $5 million to $10 million portfolios, but now they're starting to look at those in the $1 million to $3 million range, Loving said.

"It's an exciting area where investors can focus their impact," said Shane Yonston, CFP, principal advisor with Impact Investors. "But these investments need to be exercised with caution, because private investment has inefficient pricing and you could miss out on liquidity and day-to-day pricing. There are more opportunities for pricing disconnects."

On the plus side, he said, private equity has a low correlation with the stock market and it provides a direct, measurable impact to a given cause.

Some of the socially responsible and impact investing deals he has worked with include working-class apartment buildings, an LLC that lends money to socially and environmentally responsible international enterprises (for example, clean diesel distribution in Zambia) and a fund that buys solar and wind farms with long-term contracts to sell energy to utility companies.

"By doing these private equity deals, we're augmenting the green economy," Yonston said. "Investors are playing the role of a bridge from early stage to public markets."