In recent years, investors have woken up to the benefits of investing in private equity and taken a growing interest in the space. A report by the Private Equity Growth Capital Council provided one key reason: Private equity has outperformed the stock market by an average of 6.5 percentage points over the past ten years. Private equity is highly dynamic, with a constant stream of possible investment opportunities coming to market in a wide range of industries. And, with start-up and private placement deals becoming more accessible to accredited investors, thanks to the rapidly growing equity crowdfunding industry, investors will likely continue to seek out opportunities in this space.
However, according to a recent poll of 682 PENSCO clients, most investors do not understand how to find a private placement opportunity that would meet their risk profile. In order to help evaluate these kinds of opportunities for clients, advisors need a better understanding of the private equity landscape.
Today, there are a number of interesting factors that advisors should be aware of that are affecting deal flow within the private equity space. The growth of crowdfunding, increased opportunities in the technology sector, and the ongoing impact of regulation are all vital areas of consideration.
Growth All Over
In 2012 the Jumpstart Our Business Start-Ups (JOBS) Act passed, which lifted the general solicitation ban for accredited investors (meaning investors with a net worth greater than $1 million, excluding the value of their primary residence, or an income of $200,000 a year or more), which allowed private companies and startups to advertise deals publicly through avenues like crowdfunding platforms or social media.
The passage of this legislation spurred the launch of a steady stream of new equity crowdfunding platforms that together helped raise an estimated $2.7 billion online, a figure that grew to $5.1 billion in 2013. As new sites come to market almost daily, investment opportunities are emerging everywhere for accredited investors, with many coming from less traditional markets. In fact, areas outside of the traditional east and west coast markets for angel investors and venture capital are seeing more investment opportunities and interest, especially in states like Ohio, Colorado, Arizona, and Pennsylvania.
Of course, growing popularity is not without complications. As more companies and start-ups enter the space, the industry becomes more diluted, making it more difficult to find quality deals with high returns. The specter of fraud also comes to the fore. Advisors need to be increasingly thorough and careful in vetting deals for their clients, and must conduct razor sharp due diligence to confirm the viability of deals. Finally, as the law stands now, participation in these deals are limited to accredited investors, and the industry is still waiting to see if crowdfunding will be opened up to the general public with the passage of Title III of the JOBS Act, which would allow companies to raise capital from non-accredited investors through online portals. While it could take some time for the SEC to come down with a decision on Title III (according to some reports, these rules might not go into effect until January 2016) advisors should watch this space closely in order to understand the possible implications that these regulatory changes could have on their clients going forward.