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The Power of Private Investments in an Investment Portfolio

Hey, everyone. Thanks for joining today. I’ll be speaking with Adam Ponder. He is the co-founder and CEO of Alta Trust. Thought for the day: if you look at the Forbes 400 and you take out people that inherited their money, 100% of those people made their wealth through private investments. The action for the day is to go out and demand to see what is available to you, whether it be through your financial advisor, your own individual networks, whatever it may be, take a look at what opportunities are out there for you.

Quick Disclaimer. You do need to be an accredited investor, which means you have to have over a million dollars in net worth. But if that’s you, this is an absolutely fundamental part of investing that you should be participating in.

Need for private investments

Not everyone wants a private investment because they need to be accredited investors to offer it to their clients. But most advisors know intuitively or from hearsay that wealthier clients demand more than just public investments. Most importantly, as an advisor, you need to be able to add value. The average client is not going to be pleased by a low percentage of allocation to emerging markets. So to add value to people that made their money in real estate or private equity, you give them something interesting. Most wealthy people want more money, but they have other motives too. They want to connect with their investments and to know what they’re investing in. Investors want to do something good, like impact investing which has been a big deal lately. That said, investment advisors have an opportunity to give all of that and more to their clients. For example, a client sells their business for $20 million and the advisor takes the $20 million assuming the client doesn’t say anything. Consequently, the advisor plows the money into the stock market. Instead, better use of that money is to put part of it into the stock market and allocate some of it back to private equity such as private real estate. There is a whole spectrum of private investments so what tends to happen is there’s a little bit more of an edge. There is more control that can be gained with private investments. With private investments, you have an opportunity to influence the investment. A lot of people like the idea that they don’t have to run everything while still having some influence.

Meaning of private investments

Private is a very general term meaning it’s not listed on a public exchange and is not publicly available. A venture is when you take a minority stake in the company. Depending on the stage, you don’t have earnings or much in the way of earnings. An example of early-stage venture capital would be someone with a brand new start-up company working out of their garage and in need of $10,000. Then, there is middle to late-stage venture capital as well. Venture capital is risky because you’re investing in the idea that a team can bring an idea to fruition. Moreover, there is the original and common thought of private equity: a private company making very profitable money. This could be a local or regional company that has a private equity fund or firm that comes in and buys. Traditionally, someone would buy several small local or regional companies and roll them into one. This is referred to as a buyout fund or a roll-up fund. This can be taken to another level by making it a leveraged buyout fund used to help scale things even further. The process can be thought of in terms of early venture capital to large private companies. Ultimately, some of these companies are large private companies, with good cash flows, and high profits, but still not public.

Benefits of Controlled Investments

There is a valuable opportunity for advisors who care about their clients to get more control of their investments. The idea is that based on what advisors think is best for their investors, they make those decisions instead of being along for the ride. This creates some aspects of control. For example, if you invest in a venture capital deal, you’re going to have early influence. Resulting in the ability to network, make connections, and help accelerate the company in a way you could not have otherwise, such as a large company. If an advisor or someone on the board has the expertise in the field of interest then you can have influence based on their knowledge to invest in that area. However, even if advisors don’t know the specific area, you can always hire that knowledge. Additionally, if you are an advisor you may have clients who are knowledgeable within different markets. There are many ways to source that knowledge which can lead you to someone you trust. For example, someone who knows how to start up a staffing company that will be profitable right away. That person in charge of this company already has everything lined up with their players set. Whereas someone who has no expertise in staffing companies could take several years to figure it out. In the case of starting a staffing company, it would be beneficial to source out an expert. Unfortunately, some advisors are not very open-minded to think that these options are possible.

How to get set up

There are a few barriers to entry, the first is costs. It tends to be upward of $100,000 just for the legal work. After the legal work, there is still room for error if there is no direction. This can be avoided with a little bit of help. And what we want to do is cut the setup fee and time to market way down to keep everyone safe from being backtracked with consulting. For example, the investors on Shark Tank can invest in other companies, source them, screen them, and manage them. It is more accessible than it has ever been to do this because it is not too expensive or difficult to pull off nowadays.

What to look for 

When an investor starts looking for private funds they should dive into several things before going in full board. Starting with track records, usually found in private equity. There are also vintage funds. For example, you have a vintage 2020 fund that took the capital in the year 2020. Naturally, you would want to see if they have other vintages and how successful those have been in the past. This includes audit financials and their team. The most important aspect is the team because we like to put together funds that are very high quality and legitimate. But we also like to make sure that the people that we’re working with are reputable. Even if not every investment works out perfectly, it is still important that the team is solid and is going to do the right thing for the investor. So as an investor, the first thing to look for should be the team that is carrying this out. For example, if you want to set up a real estate fund and get some capital together but you don’t have any expertise in real estate. However, you know someone who does have that expertise. This would be a great opportunity to collaborate and put together an advisory board or a team to manage the investments and benefit everybody. Additionally, every adviser should have a unique offering or something new regularly. The clients demand that you don’t have all their money if you’re not offering something like this because they’re going to make these investments with or without you. The goal is for them to be made with you as an adviser.

Costs and returns

One of the main benefits of private investments is the fact that you get closer to the investment and cut out all the middlemen costs. As well as regain control and make decisions. Whether it’s a fund of funds or a direct investment, you gain efficiencies because of some deals you can’t invest in on your own. So if you put together a fund that per se has a $500,000 minimum and pulls everyone together, you’d be making it more accessible. And those are typical cost-effective funds anyway. Overall you get access, lower cost, more involvement, expertise, and better returns. There is a huge missed opportunity right now because only 14% of investment advisors recommend these investments and only 2% create them themselves. The advisor needs to have a comprehensive offering and those that do will be rewarded.


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