Middle-class investors will someday be able to invest in private equity, an area now reserved for wealthy and experienced speculators, according to Marcus New, CEO of InvestX, a firm that specializes in the pre-IPO marketplace.
“Currently, only accredited investors are able to invest in private companies, but the Securities and Exchange Commission is looking at loosening those rules and eventually investment possibilities will move down to the mass affluent,” New said in an interview.
“The SEC has proposed changes to its decades-old definition of a professional investor in order to allow more Americans to buy shares in private companies in hopes of boosting retail investors’ access to the swelling pool of companies that are staying private for longer and longer,” New said.
“We believe the evolution of this is to allow the mass affluent population – investors with more than $200,000 in investable assets and $100,000 in income is one definition – which represent approximately 8% of investors, as the next logical group to be able to invest in private shares,” he added.
Historically, private equity investing has been the exclusive domain of less than 1% of the investing universe – specifically the institutional investor and the ultra-wealthy. Professional investors have relied on private equity investing to make their big, double-digit returns. Private equity typically outperforms other asset classes, including the public market, InvestX said.
InvestX, which was created in 2014, focuses on investing in private companies and enabling broker-dealers and RIAs to do the same. The privately held firms trade on InvestX’s marketplace platform known as GEM. The platform allows broker-dealers to easily trade in private equity through a transparent technology solution, InvestX said. The GEM acronym is representative of the high-growth sector and stands for Growth Equity Marketplace. InvestX GEM connects broker-dealers with access to shares of private billion-dollar technology companies and offers them a platform to trade these shares.
New said the interest in private equity investments is growing, in part because of ability to reap lucrative returns.
“InvestX was founded with the idea to democratize access to the private equity asset class by eliminating the traditional multimillion-dollar investment minimums by offering fractional shares and by providing clarity and security in a highly complex market,” New said.
The firm specializes in investing in late-stage, pre-IPO, multibillion-dollar firms that are backed by venture capital. New said InvestX wants venture capital to be involved because “it is a standard that we believe helps to significantly reduce investment risk.” Venture capital requires extensive due diligence and valuation by the lead investor, which results in very few companies qualifying, he added.
InvestX now provides the capability for broker-dealers and RIAs to access this asset class, New said. InvestX does the due diligence and handles the compliance issues for the broker-dealers and RIAs. Private companies are less transparent than public companies and, frequently, an abundance of information is not available about them.
The companies InvestX puts money into are usually on the verge of becoming publicly traded or being merged with another private company. The average investment is less liquid than an investment in a public company and is held for about three years, although some investors hold the investment for many years, New said. The firm makes its own investments, as well as handling investments for broker-dealers and RIAs. It currently has approximately $500 million in assets under management.
“Having the ability to invest in private companies for your clients is a differentiator for advisors and sets them apart from their competitors,” New said. “There is an insatiable demand from family offices and institutional investors for the ability to invest in private equity.”
Investors have to take into consideration that there are risks associated with private equity investments, New acknowledged.