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The value of private investing

Alternative investing Canada

When you hear the term private investing, it might conjure up various images, especially to unprofessional investors. However, private investing isn’t necessarily about doing it in private. Rather, private investing simply means investing in something that isn’t available to be traded publicly, particularly on a public stock exchange.

Public versus private investing

As a result, there are various consequences to engaging in private investing, versus public trading. On the one hand, although publicly-available investments are generally more accessible to the public — as an example, anyone can open a discount-broker account and start trading today — public trading also means that more regulations are attached, such as the prospectus requirement, which has those offering publicly-traded investments provide all kinds of information not required for private investments.

Private and alternative investments

Of course, there are always two sides of a coin — or an argument, so to speak. So, while federal regulators will argue that the prospectus requirement ensures investors get all the information they need before investing, it can also limit the kinds of investments being offered, especially to those seeking alternatives.

The evolution of private investing

There is also something else to keep in mind when it comes to the market for private investments. This isn’t 1970. Private investments have evolved over the years, to the point where even the regulators have had to adapt. As a result, the private investments market is generally more open than it was before.

Specifically, private investments used to be available to what’s known as an accredited investor, which is a term that generally applies to high-net worth individuals and investors. However, today, that’s not the case, as various exceptions have been made to allow for smaller investors. And this, by the way, not only benefits accredited investors, but also companies seeking to raise capital in the private markets. The more open the market is, the more opportunities that are available for everyone.

ASCEND GRP is an asset-management firm, with offices in Toronto, Richmond Hill, and New York, that services clients seeking investment opportunities worldwide.

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The value of private investing

Private investing explained

When a person first hears the term “private investing,” he or she might conjure up images of people who know each other giving each other money. However, over the years, the private investment market has developed its own set of rules and procedures that distinguishes it from public investing while allowing the two — private and public — to co-exist, in a manner of speaking.

Let’s take a brief look at what private investing is and the value it brings to certain types of investors.

Private vs. public

From a broad perspective, private investing is essentially any investing that doesn’t take place in the public markets, such as is typically done on a stock market, for example. However, even the private investment market doesn’t occur in a regulatory vacuum, which means, like public investments, it comes with some regulatory requirements, but not as many. Let me explain.

As an example, generally speaking, investments one can purchase on the stock market usually require a prospectus, and the disclosure requirements of public investments are generally more stringent than in the private markets.

Risks and returns

On the other hand, that doesn’t mean that the private markets don’t come with any disclosure requirements. For example, within the mortgage industry, mortgage investment corporations (MICs) usually come with a disclosure document often called an offering memorandum, and specifically qualified “accredited investors” can, generally speaking, only participate.

Some might say that these types of disclosure differences mean that the private markets are riskier. In a sense, they are. But there are two points to consider here. First, as the saying goes, without risk, there is usually no reward. As a result, private markets do allow for more risk and, as an extension, higher returns.

However, the second point is important too, which is this: the less regulation there is in any market, the freer investors are to take responsibility for the performance of their portfolios. This also means that investors can seek to form relationships with specialists in the field of private investments who know how to manage the risk in a way that benefits demanding clients.

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The exempt markets — explained

Understanding exempt markets

There may be some confusion surrounding what exempt markets are, how they work, and what kind of opportunities they present to investors. Perhaps a brief explanation, and some perspective, is in order.

First, in Canada, exempt markets are a specific classification for investments mostly surrounding the reporting requirements of any particular investment security or opportunity. So, in essence, an investment opportunity that meets the classification of an exempt market is, as the name suggests, exempt from certain requirements, especially that of the issuance of a prospectus.

Investor knowledge and protection

Does that mean that investment securities without a prospectus are less secure, so to speak? No. In fact, as many knowledgeable investors are aware, the existence of a prospectus certainly doesn’t guarantee investors are properly informed, nor does it in any way constitute a formula for investing success. It’s simply a reporting requirement in most public markets, while extremely safe and well disclosed investment opportunities are offered in the private markets too — without prospectus.

This doesn’t mean that securities offered in the private or exempt markets come without due financial reporting. Many of them, such as mortgage investment corporations (MICs), come with a rather standard offering memorandum. Exempt market securities also often come with accredited investor requirements, minimum transaction thresholds, and are done in the private markets where rather large investors — both individual and institutional — can have access to structured investments more suited to their specific needs.

The right people

Of course, what makes the path towards the exempt markets much more navigable is dealing with financial professionals and managers who know their way around and can offer investors the knowledge, experience and performance needed for success.

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