Private Equity is Popular Among Billionaires . . . and Among Self-directed Investors – Here’s Why

Published on July 28, 2022

According to a recent article on Bloomberg.com, there is some concern about the future of private equity (PE) investing. The author cited fewer initial public offerings, hesitation by banks to give buyout loans, and pension and endowment funds allocating less money to PE as an asset class (due to a selloff of global stocks and bonds). All these factors are contributing to fewer deals in terms of buying and selling companies.

However, PE is now attracting ultra-high-net-worth family offices and retail investors. Billions are being invested in venture capital funds and a survey by UBS revealed that among the biggest family offices with an average of $1.2B in assets each, 21% of their money was allocated into PE.

Why PE?
The family offices are seeking to boost returns and are seeking to broaden their asset allocation in alternative assets.

The UBS survey also showed that among respondents, 85% said they’re likely to invest early-stage companies this year, up from 74% in 2021. And about 75% of these billionaire families believe private equity will continue to outperform public markets. Plus, 51% plan to increase their asset allocation into direct PE investments and 44% plan to do so in PE funds within the next five years.

Private equity and self-directed IRAs
You don’t need to be a billionaire to include private equity as an alternative asset within a self-directed IRA. Private equity funding is growing in popularity among self-directed investors—especially since the SEC broadened the criteria regarding accredited and nonaccredited investors with full passage of the JOBS Act. This enabled a wider pool of investors to add private equity funding part of their self-directed retirement plans.

And given the volatility of the markets today, savvy investors seeking to diversify their retirement portfolios—and create a hedge against both inflation and market volatility—are looking at private equity as an alternative asset class that can enhance portfolio returns. As we’ve written in a previous post, self-directed investors can include the following PE investments:

• Private common stock, preferred stock; options, rights, and warrants
• Private hedge funds and exchange-traded funds investing in private held companies
• Limited liability corporations (LLCs), limited partnerships (LPs)
• Foreign private equity
• Convertible notes
• Private and non-traded REITs (real estate investment trusts)

These are all non-publicly traded assets which qualify them for inclusion in a self-directed IRA; however, PE investments—like many nontraditional investments allowed through self-direction—are often illiquid and should be considered as a longer-term investment.

One clear benefit of PE investments is that returns they deliver do not necessarily correlate with markets. So, while traditional investors are worrying about stocks and bonds on the decline (or slow to rebound), PE investors are helping early-stage companies or those seeking growth capital to thrive.

Are you adding private equity to your self-directed IRA? Next Generation can help.
Remember that as with any alternative asset held in a self-directed IRA, you as the account owner are responsible for preforming thorough due diligence on any potential PE investment, and you make all the investment decisions regarding the account. Your trusted financial advisor can offer insights into how adding PE investments may affect your tax picture or help you reach your retirement savings goals.

If you have questions about how PE investing works through self-direction, you can schedule a complimentary educational session with one of Next Generation’s team members. At Next Generation, we are committed to client education; our helpful experts can explain the ins and outs of self-direction as a retirement wealth-building strategy and share information about the many options and benefits of investing through a self-directed IRA. Contact us by email at NewAccounts@NextGenerationTrust.com or call us at 888.857-8058.