Private schools. Private beaches. Private clubs. Many people enjoy the mystique of belonging to something private, even if the activities that take place within the group or organization are almost the same as those in its public counterparts.
When it comes to investing, however, private investment firms are a horse of a different color. Here is a primer on what private investment firms are, and what they do.
Private Eyes On The Prize
A private investment fund is, as the name implies, an investment company that sources capital from investors other than the general public. They are not listed on the public Stock Exchange, but they may buy out public companies, take them private, and restructure them for future growth. These are pooled investment vehicles, often with high risk.
Private investors generally fall into four main categories in 2023:
1. Friends and family
2. Angel investors
3. Venture capital (VC) firms
4. Private equity firms
For the purposes of this article, private equity firms are nearly synonymous with private investment firms, as the term applies to businesses that already have a strong operational profile and a demonstrated growth opportunity.
Private investment fund members and managers, such as Cyrus Nikou, who founded and manages Atar Capital, tend to have deep industry knowledge and expertise. They are influential leaders with the contacts to grow and sustain a private investment firm, even under challenging market conditions. Atar, for example, has delivered aggregate revenue in excess of $1.5 billion per year since its inception in 2016.
Why Be Private With Investments?
OK, being private is clearly a cachet. But there are reasons besides prestige that motivate investment professionals to launch private investment firms. Private investment funds enjoy several distinct advantages over their public counterparts:
· Regulatory Flexibility
The legal and regulatory requirements for private investment funds are more relaxed than those for publicly traded funds. Just as with private clubs, what transpires privately has less oversight.
To qualify as a private investment fund, a fund must meet one of the Congressional regulations laid out in the Investment Company Act of 1940, which regulates the formation of investment companies and their activities. The Act was created to protect investors following the stock market crash of 1929, and has since served to protect the retirement savings of many people, as mutual funds are a cornerstone of retirement plans such as 401(k)s and annuities.
In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act tightened up this historic "private advisor" exemption. This new law required many previously unregistered advisers to private funds to register with the SEC (Securities and Exchange Commission).
· Managing Family Wealth
The rich are known for funneling their wealth into diverse assets, such as art and property. In addition, extremely wealthy families often create private investment funds that enable the family members to serve as shareholders. The wealthy family has no need of outside capital, so they can keep the fund private and control the assets themselves.
Who Invests In A Private Investment Fund?
In the U.S. a private investment fund can have up to 100 accredited investors or a soft limit of 2,000 qualified investors, under two specific fund exemptions within the Investment Act of 1940. These accredited investors are individuals or businesses that are allowed to trade without being registered with financial authorities such as the SEC.
The term generally applies to "financially sophisticated" investors: high net-worth individuals, banks and other financial institutions, trusts, and insurance companies. Financially sophisticated is a euphemism for being able to bear the risks associated with unregistered securities. In common parlance: you don't (or shouldn't) gamble in Vegas unless you can afford to lose.
So how does a private investment firm operate? They generally target companies that are either in a high growth cycle, or in need of restructuring because they are failing. In the case of a failing company, a private equity fund might buy up all the shares, install a new management team, and take the company public in an IPO.
If a private investment firm makes sense for your business, now you know the nuts and bolts to find the investors you seek in 2023.
