The Barriers To Investing In Private Equity Are Too High

The rich are getting richer and the poor are getting poorer, and for that, we can largely blame policies of envy that increasingly restrict investors’ access to wealth-building instruments.

Case in point: I was recently invited to participate in a private placement, and the required paperwork was, to put it mildly, discouraging. I don’t just mean that it would have taken an inordinate amount of time to complete. I mean that no ordinary retail investor could easily fill out the paperwork without the assistance of an attorney or accountant—or both. The entire process is so convoluted and complicated that it’s easier to take out a mortgage than it is to invest in private equity (PE) and venture capital (VC).

Which is a shame. Multiple studies have shown that alternatives such as PE and VC can far outperform publicly traded stocks. One study, in particular, showed that a hypothetical $10,000 investment in a fund that tracks the S&P 500 would have grown to $76,123 over the 30 years through 2017. Not bad—until you learn that the same $10,000, invested in private equity, would have grown to an average $211,071, or 2.5 times greater than the S&P 500 returns.

Granted, PE/VC have their own unique set of risks, and shares are extremely illiquid. But the way regulators have it set up, only the uber-wealthy—those who can afford a team of lawyers and accountants—are able to participate. The barriers are simply too high for 99 percent of investors, and so they’re locked out.

(Click on image to enlarge)

investors are locked out of number 1 asset class

More and More Companies Choosing to Stay Private

This all comes at a time when companies are tapping private financing more and more in an effort to skirt going public. There are a multitude of reasons why companies are choosing to stay private, some of which I discussed last summer. One of the reasons is that publicly traded firms are facing tougher and costlier regulations. Growth in accounting and auditing fees for public companies nearly doubled between 2016 and 2017, while similar fees for private companies shrank somewhat.

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