Are Private Investments Right For You?

What Are Private Investments? 

You’ve likely heard a lot of discussion of private investments in the financial press or even the nightly news. As “private investments” is a somewhat ambiguous term, it can be difficult to determine precisely what it encompasses. Simply put, these are investment opportunities that exist outside of publicly traded financial markets.  

For example, when you purchase a share of one of the roughly 6,000 U.S. companies traded on either the New York Stock Exchange or Nasdaq, you are making a public investment. Conversely, when you invest in a privately owned business or real estate opportunity, that is considered a private investment.  

Historically, only highly credentialed or very wealthy investors can invest in private markets. This “exclusivity” can make these strategies sound very appealing, but their exclusivity alone is not a sufficient reason to pursue these strategies—especially since they often carry different risks and come with higher fees. However, private investments can offer some compelling benefits that align well with certain investment objectives.  

At Truepoint, we adhere to an evidence-based investment philosophy; therefore, we have closely watched the research on private markets for decades. Even after so much examination, it remains unclear whether private investments outperform public investments on a net-of-fee, net-of-tax basis. This is because, unlike public investments, private investments are not required to release public data, so it can be very difficult to assess them as an asset class.  

Yet, research has compellingly shown that private investments can provide valuable diversification by giving investors exposure to a different set of businesses. They can therefore target valuation inefficiencies not found in the public markets and, in turn, lower the overall volatility of a portfolio while still generating attractive absolute returns.  

Which Investors Will Benefit from Private Investments 

Today, private investments are more accessible than ever as new technological platforms have made it easier to perform due diligence and invest in these strategies. These platforms have also increased scale, so these investments can now be offered at a lower cost of entry in terms of both fees and investment minimums.  

Private investments can fill an important role for investors who have specific asset allocation needs, a higher risk tolerance, and a relatively long investment time horizon. But they also have unique features that interested investors should understand and consider carefully. First, because they don’t trade on public exchanges, private investments are not as liquid as public investments. Although some offer monthly or quarterly liquidity, other private strategies can take 10 to 12 years to distribute their funds.  

Additionally, the fees associated with private investments can be substantially higher than other investment opportunities. Although Truepoint does not increase its fees to manage such assets, the private investment vehicle itself usually charges considerable fees and expenses. Finally, many these investments do not provide tax reporting by the April 15 deadline, so investors often need to file an extension on their taxes. These are just some of the distinctive characteristics of private investment opportunities that make them a better fit for some investors than others.  

The Power of Private Investments at Truepoint 

Truepoint’s private investment allocations typically focus on real estate, private equity, and multi-strategy funds, along with private credit opportunities. Each investment we make serves a specific objective relative to the total portfolio.

As an example, we might attempt to augment yield in the fixed income portfolio through a private credit or real estate income fund. On the other hand, multi-strategy funds or private equity investments can enhance absolute returns while increasing diversification, while real estate equity investments can generate both income and capital appreciation. 

We have resources dedicated to source, vet, and monitor private investments, which is critically important given the lack of transparency associated with these opportunities. Clients who invest in private opportunities through Truepoint also benefit from the power of aggregate investing. This provides the necessary scale to access more opportunities and provide enhanced diversification beyond what they could achieve individually.  

Finally, as with all other investment decisions, the entire Truepoint team regularly consults with one another about investment opportunities and their consequences for each client’s unique situation. For instance, the investment team will coordinate with our tax, estate, and planning teams to ensure investments are properly located for maximum tax efficiency, liquidity, and estate planning purposes.  

Private investments can offer distinctive and desirable portfolio diversification for clients with specific needs. If you’re unsure whether these investments have a place in your portfolio, we can assess how they may—or may not—fit in. Our approach, driven by empirical research and decades of experience, is focused on identifying which private investment opportunities are best aligned with our clients’ objectives.