The Ultimate Guide to Private Market Investing

Getting Started with Private Markets as part of a Comprehensive Investment Strategy for Accredited Investors.

Private Market Investing has become increasingly popular over the years as investors seek higher returns in a low-interest-rate environment and an alternative to the daily volatility of the public markets¹. Private Markets can be a profitable venture for the right investor. While investing in private opportunities carry more considerable risks, for accredited investors, these exclusive investments can be exciting opportunities to participate in the early growth stages of a company. However, there are many things to keep in mind when considering adding a private equity allocation to your overall investment portfolio. In this article, we discuss the fundamentals of private equity investing and how Granite Harbor navigates the process on behalf of its clients.

What is private market investing?

Private markets refer to investments made in private, non-publicly traded companies or funds. These investments are typically made by high-net-worth individuals (i.e., accredited investors) and institutional investors such as pension funds, endowments, and insurance companies. Capital is pooled together to purchase equity in private companies or funds. Investor funds go directly into a project rather than through an intermediary such as a publicly traded stock, mutual fund, ETF, or bond. Private market investments are considered "high-risk, high-reward" investments due to the potential for significant returns but also the possibility of substantial losses.

Why private market investing?

Investors are increasingly diversifying their portfolios to include private market investments. Historically, private companies went public to raise capital for growth initiatives. Today, there is abundant cash available in the private sector, offering growing companies the opportunity to raise the money needed for growth direct from investors while remaining privately owned² . This growing asset class provides investors a unique opportunity to be involved in the early stages of a business life cycle, allowing their investment to grow with the company. When a company does pursue a liquidation event, either through an IPO or acquisition, it's from a stronger position which can lead to the potential return being much more significant. Private markets are also unique in that investments can be more visible, tangible, and finite when compared to their traditional counterparts in a portfolio of stocks and bonds and offer investors the potential for greater control over how and where their investment dollars are applied.

Who can participate in private market investments?

Accredited investors are individuals or institutions that meet specific financial criteria, which allows them to invest in alternative investments that are not available to the general public. The Securities and Exchange Commission (SEC) determines who qualifies as an accredited investor in the United States³. To qualify, an individual must have a net worth of at least $1 million (excluding the value of their primary residence) or an annual income of at least $200,000 ($300,000 for married couples) for the past two years and a reasonable expectation of earning the same income in the current year.

The purpose of the accredited investor rules and the qualified purchaser rules, are to separate those who have less investment experience from those who should have more knowledge and experience with investing. This rule helps protect investors from making poor investment decisions and losing money they would otherwise need. Being an accredited investor provides access to a broader range of exclusive investment opportunities; however, accredited investors must understand the risks involved and carefully evaluate each investment opportunity before investing.

What to consider when accessing private market investments for the first time?

When considering private markets for the first time, it's imperative to consider the pros and cons and partner with the right firm with a rigorous due diligence process. A private markets firm that is also a Registered Investment Adviser (RIA) can provide a greater service to individual investors as it has a fiduciary obligation to its clients. An RIA works to evaluate whether a private market investment is appropriate for a client and identify how it may work as part of their overall portfolio of investments. Alternatively, investors can go directly to a developer or company that raises capital; however, these groups are not RIAs and do not have the same fiduciary obligation to always act in the client’s best interest and analyze the solutions they offer to investors thoroughly. The role of an RIA is to bring value to investors by directly evaluating and vetting private market opportunities on behalf of their clients, providing oversight and transparency that may not be available through other private market institutions.

Granite Harbor Advisors, Inc. is an Independent RIA that can offer both public and private market investments, uniquely providing a comprehensive perspective and diverse investment portfolio options. By partnering with an RIA, investors can access private markets with the confidence that the firm has met a thorough due diligence process and will act in their best interest.

What is Granite Harbor's due diligence process for private market investments?

Granite Harbor conducts thorough due diligence and analysis on private market opportunities, vetting each opportunity to confirm its viability for individual accredited investors and its role in their overall investment strategy. At the onset of each new opportunity, Granite Harbor first asks:

• Does this project make sense?
• Does this project have economic viability in the market?
• Does the operator have a track record in this particular asset class?

If the answer is yes to each of the above questions, the due diligence process begins and involves a team of experienced experts, including legal, operations and finance, to assess the opportunity and identify and disclose all risks associated with that project.

Once a project is approved, the RIA continues to monitor it, ensuring that it stays in line with the original pro forma and the established guardrails. When an operator works with Granite Harbor, they do not receive a proverbial blank check but rather an investment into a well-structured growth plan. From there, operators provide quarterly updates and detailed annual reporting on the project's progress, per requirements, as part of the investment agreement. These updates are shared with investors, ensuring they know how their investment is progressing. Granite Harbor takes a "hands-on" approach to managing the investment, keeping abreast of progress, making them an informed resource for investors as additional questions arise.

This thorough vetting process is an immense value add for Granite Harbor, and it's a reason why investors may want to access the private markets through an RIA rather than directly with a private company or institution that does not abide by fiduciary standards.

What are common "exit strategies" from a private market investment?

Most often, private market firms exit their investments after a few years by selling to larger private market firms or other third-party buyers or taking the investment public.

Selling to Larger Private Market Firms or Other Third-Party Buyers: When a private market firm acquires a company, it usually has a plan to increase the value of the company within a few years. Growth plans may include expanding the business, improving operational efficiencies, introducing new products or services, or, when it's a real estate private equity investment, completing the construction process or project. Once milestones are met, the private market firm looks for a buyer to sell the company or real estate project to realize the return on investment. This buyer can be another private market firm, a strategic buyer, or a combination.

Going Public: Another exit strategy for private market firms is taking the investment public through an initial public offering (IPO). This strategy is often used when the company is well-established and has a strong brand and financial performance. By going public, the private market firm can monetize the return on its investment and provide liquidity to its investors. A notable example of how this exit strategy can fare for investors is Peter Thiel and Facebook. Thiel was an early investor in Facebook, investing $500,000 in the company in 2004 when the company was still private. Private equity investments allowed Facebook to remain a private company for longer, allowing the company to grow and scale without the added pressures and regulations of being publicly traded. By the time it went public in 2012, Theil's half-a-million-dollar investment was worth more than $1 billion⁴. While this is a 'best case' private equity investment scenario, it does help to illustrate the use of proceeds by private companies and the opportunities associated with private company investments.

The role of an RIA in the exit strategy is critical as it can help identify potential buyers, negotiate the terms of the sale, and ensure that the exit strategy aligns with the investor's goals.

Why partner with Granite Harbor for private market investing?

Granite Harbor is a Registered Investment Adviser who serves as a fiduciary on behalf of its clients. As a fiduciary, Granite Harbor upholds the best interest standard for all investment recommendations made to clients, whether public or private market investment recommendations and provides unbiased and transparent advice in the best interest of its clients. This distinctive combination allows Granite Harbor access to the broader array of investment opportunities available in the marketplace with the ability to further customize its clients' investment portfolios, with public and private market investments, to wholly meet the specific needs and goals of each of the clients it serves.

Granite Harbor considers each private market investment opportunity with the end in mind and has an identified exit strategy with a tentative timeline before moving forward with a new venture. Further, upon liquidation of the private market investment, it works one on one with investors to structure the returns from the investment in a tax-advantageous manner and realign their investment portfolio strategy to meet the individual goals, risk tolerance, and time horizon at that time.

Unlocking the Full Potential of Your Investment Portfolio: The Power of a Holistic Approach to Public and Private Markets for Affluent Investors

Accredited investors can benefit from having exposure to both public and private markets, as each offers unique investment opportunities. Public markets provide liquidity, transparency, and diversification. In contrast, private markets offer a compelling opportunity for accredited investors to access unique "high risk, high reward" investments not available to the general public. If you're an accredited investor, it's worth exploring the potential of private equity investments and considering them as a part of your investment strategy.

For more information or to discuss if private equity may be an appropriate strategy for your investment portfolio, give us a call at 832-461-0789 or use the link below to schedule a convenient time to discuss your needs.

FEATURED RESOURCE:

Pros and Cons of Private Equity Investing: What You Need to Know as a High-Net-Worth Investor

This commentary reflects the personal opinions, viewpoints and analyses of the Granite Harbor Advisors, Inc. employees providing such comments, and should not be regarded as a description of advisory services provided by Granite Harbor Advisors, Inc. or performance returns of any Granite Harbor Advisors, Inc. client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this commentary constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Granite Harbor Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

1 https://www.economist.com/special-report/2022/02/23/private-markets-have-grown-exponentially

2 https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/global-private-equity-dry-powder-approaches-2-trillion-73570292

3 https://sec.gov/education/capitalraising/building-blocks/accredited-investor

4 https://money.cnn.com/2012/08/20/technology/facebook-peter-thiel/index.html