Many investors think about their portfolios not just in terms of the next few years or upcoming life milestones, but as a key source of funding for their lifetime.
Yet building lasting wealth has become more challenging in a market environment defined by volatility and uncertainty. As a result, public market investments alone may no longer provide the stability needed to achieve long-term goals. That’s where private markets can plug the gap for investors with their eye on longer-term returns. Alternative asset classes like real estate, private equity and private credit can offer diversification, reduced correlation to public markets and growth potential beyond what can be found in traditional stocks and bonds. For sophisticated investors seeking pathways for greater portfolio resilience and return potential, private markets can be engines for long-lasting wealth.
What are private markets and how do they differ from public markets?
“Private markets” generally refer to investments in companies or assets that are not traded on public exchanges. In contrast, public markets involve securities such as stocks or bonds that are listed and traded on public exchanges.
Key differences include:
- Liquidity: Private market investments are typically far less liquid than public stocks or bonds. They may require a multi-year holding period before an exit opportunity arises and are therefore more suited for long-term investors.
- Transparency and disclosure: Public companies are subject to extensive reporting and regulatory disclosure. Private companies often are not, so information can be limited and harder to obtain.
- Opportunity set: Private markets offer access to companies or assets that may not yet (or ever) be publicly listed. That means the opportunity set may be broader, since private market investors can potentially access companies from the point of inception on. But while the opportunity set may be broader, early-stage opportunities are more likely to fail than established, public companies.
- Access: Private market investments tend to have eligibility criteria regarding who can invest based on factors like net worth, income and financial licensing. For this reason, private market investing has historically been in the playbook of ultra-high-net-worth and institutional investors, though access is widening.
It’s also worth noting scale: According to Preqin, private-market assets under management (AUM) reached about $11.87 trillion in 2023 and are projected to grow significantly in the coming years. Institutional investors are also significantly increasing allocations to private markets in part for its diversification benefits.
Using self-directed IRAs to access private market opportunities
Access to private markets has been historically limited to large institutions and ultra-high-net-worth investors, but the landscape is evolving. One avenue available for individual investors looking to tap into alternatives is a self-directed IRA (SDIRA).
A self-directed IRA is a tax-advantaged retirement account that allows the investor to hold alternative assets beyond typical traditional brokerage offerings like stocks, bonds and mutual funds.
Self-directed IRAs enable much broader investment opportunities than traditional retirement accounts by placing the power of investment decisionmaking in the hands of the account holder. Investors utilizing this vehicle can allocate money toward asset classes like venture capital, private equity and private credit, while still participating in the tax advantages of other retirement accounts. Investors can deploy capital into long-term private market investments while benefitting from tax-deferred (traditional IRA) or tax-free (Roth IRA) growth.
Key considerations and rules
Using a self-directed IRA to invest in private markets may come with added complexity. Investors and issuers of private securities must follow certain IRS and SEC rules and guidelines like steering clear of prohibited transactions and ensuring their self-directed IRA is facilitated through a custodian. Other consideration include:
- Illiquidity: Since private market investments may be locked up for years, investors should plan accordingly in respect to retirement timelines and required minimum distributions.
- Due diligence: Because private companies and funds are less regulated, the burden of vetting lies with the investor.
- Accreditation requirements: Many alternative investments require investors to meet specific criteria regarding their networth, income or financial licensing. Investors should be prepared with documentation to support their accreditation status, or they may be unable to participate in certain offerings.
How private market investing and SDIRAs can build lasting wealth
By allocating retirement funds to private markets, an investor may capture growth not available in public markets, then allow that capital to compound inside the retirement vehicle until distributed by heirs. As such, self-directed IRAs are vehicles that align well with a longer time horizon when considering that retirement portfolios may be held for decades and then passed on. Assuming an investor has the liquidity needed for retirement, this makes self-directed IRAs viable conduits for private market investing with long-term wealth in mind. But note, while private markets have the potential for outsized gains, they are intended for seasoned investors that can consider the unique risks of private market investing, including but not limited to a lack of operating history, leverage, lack of liquidity, diversification and concentration risk, and risk of a complete loss of an investment.
Private market asset classes for long-term wealth creation
These are a few private market asset classes that investors might consider if seeking lasting wealth creation.
Private equity involves investing in privately held companies. While each individual investment presents its own risks, private equity has historically offered higher returns than public equities for investors willing to commit to a longer path to liquidity. Because private companies often are less mature than public ones, value creation can occur through operational improvements, strategic repositioning and time. For a long-term investor, capturing early-stage or growth companies that ultimately mature into large enterprises can deliver meaningful wealth accumulation potential.
Private credit (or private debt) refers to lending outside of the traditional banking system, typically to privately held companies. Private credit is a rapidly growing asset class. For investors, private credit can offer income generation and potentially lower correlation with public bond markets. Over decades this income stream can add to the compounding effect and help build wealth by producing cash flows that are reinvested.
Real assets
Private real assets such as infrastructure (data centres, utilities, transportation), real estate (commercial, multifamily) or natural resources may provide long-term stable cash flows and inflation hedges. For example, infrastructure projects often have long concession periods and predictable revenue that can bolster a portfolio for decades. These assets grow over the long-term with potentially lower volatility than pure growth stocks.
Venture capital/pre-IPO investing
For those with higher risk tolerance and a long horizon, early-stage investing in start-ups or pre-IPO companies can offer upside potential by participating in a company’s growth from early on through maturity, before they are publicly listed. It’s important to note that those interested in venture capital investing should be comfortable with the higher risk, failure rates and illiquidity that come with it.
Putting it all together: Considerations for building lasting wealth through private markets
To begin investing in private markets, investors should consider taking these four steps:
- Define a horizon: Long-term wealth implies a timeframe of multiple decades. Choose investment vehicles and assets that align well.
- Allocate thoughtfully: Private markets are illiquid and should form a portion of the overall portfolio rather than the entire portfolio. Diversify with a variety of asset classes.
- Partake in tax advantages where applicable: A self-directed IRA can be a tax-efficient vehicle for private investments, helping keep more capital in investors’ wallets.
- Monitor and adjust: Even though private assets are long-term, periodic review ensures an investor’s allocations continue to align with broader goals and liquidity needs.
For investors with a long time horizon and a desire to build wealth that lasts for their lifetime or longer, private markets offer a compelling complement to public equities and bonds. The wider opportunity set, return potential and diversification benefits make private markets a powerful tool for forging wealth. Access to alternatives is becoming increasingly attainable through vehicles like self-directed IRAs, which allow investors to leverage retirement funds for participation in assets like private equity, infrastructure and private debt. Approaching building a private market portfolio thoughtfully, with close attention to allocation, tax efficiency, vehicle selection and goal alignment, can result in a portfolio that not only grows wealth but enables its preservation.
As with all investing, private markets are not without risks. Reduced liquidity, transparency eligibility, and a risk of a complete loss of an investment do apply. But for sophisticated investors who are willing to commit capital for the long run and conduct their due diligence, private market investing can help fuel wealth creation that lasts for decades to come.
