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October 30th, 2024

Proposed “Test” to Gain Access to Private Investments

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William M. from Los Angeles, CA asks: Hello Mitch, I recently learned about a “test” being floated to give more individual investors access to private market investments. Are you familiar with this test, and what’s your general view on diversifying further into private markets? Thank you.

Mitch’s Response:

Thank you for writing, William.

First, for readers who may not be familiar, investing in private markets refers to non-traditional assets that are not listed on exchanges—such as investments in private equity, venture capital, real estate, private debt, and so on. Back in the early 1980s, regulators decided that these investments should only be made available to “accredited investors” or financial institutions, which for individuals meant having at least $1 million in net assets (not including primary residence) or at least $200,000 in annual income for single filers and $300,000 for joint filers.1

These income and net worth levels were largely arbitrary at the time, meaning that less than 2% of households could access private market investments. Today, given 40 years of inflation and rising incomes and markets, a little under 20% of U.S. households qualify.

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Some U.S. lawmakers are looking to expand access even more. A new bill in the Senate calls for a test—much like a driver’s test taken for licenses—whereby investors could prove “financial sophistication” by answering questions on topics like securities, disclosure requirements under securities laws, corporate governance, financial statements, and the liquidity and leverage risks involved in private market transactions. Passing the test would mean being able to make private securities.

Before sharing my view on private market investments, readers should understand that this “test” is simply a proposed bill at this stage – it still has quite a distance to travel before becoming law. Regarding private securities in general, there are pros and cons. The pros are the ability to earn returns from varying sources, like real estate or investments in a private company or private debt. The cons are the risks that come with these investments—looser disclosure rules than public market investments, often substantially less liquidity, higher fees, and less comprehensive reporting standards.

The question for many individual investors, then, is whether you have the time and resources to conduct thorough due diligence on each investment opportunity and whether your experience in evaluating investments in areas like private debt or pre-IPO companies is sufficient to guide you to a sound risk/reward analysis. Many investors can accomplish their long-term objectives by investing in public markets, where information is plentiful and long-term return potential is well-established. Being able to invest in private markets may expand the opportunity set, but the question may be whether it’s necessary for most investors.

Understanding private debt and pre-IPO investments can greatly affect your investment strategy. To manage these aspects effectively, it’s important to take proactive steps to protect your investments and create a retirement portfolio that meets your financial goals.

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Disclosure

1 MSN. 2024. https://www.msn.com/en-us/money/markets/private-markets-are-reserved-for-the-rich-should-a-test-let-you-in/ar-AA1sHuV4

2 ZIM may amend or rescind the “7 Secrets to Building the Ultimate DIY Retirement Portfolio” guide for any reason and at ZIM’s discretion.

3 ZIM may amend or rescind the “7 Secrets to Building the Ultimate DIY Retirement Portfolio” guide for any reason and at ZIM’s discretion.


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