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.