AWM Insights Financial and Investment News

It seems natural that the most skilled and talented managers should be able to outperform on a consistent basis. In reality, the data doesn’t support this and it actually shows the opposite. In public markets, persistence, or the ability of the best to stay the best, just isn’t shown in the evidence. 

If the fund managers with all their large payrolls, research, and connections can’t reliably outperform then the advisors picking stocks in their client accounts are at an even bigger disadvantage. 

Index returns have been an amazing wealth creator over the last 100 years but indexes also have inefficiencies and pitfalls than can be avoided to target higher expected returns. Systematically targeting and improving the indexes allows for a more reliable way to seek returns above the index for long-term investors.       

Have questions for an upcoming episode? Want to get free resources, book giveaways, and AWM gear? Want to hear about when we release new episodes? Text “insights” or the lightbulb emoji (💡) to Brandon at (602) 704-5574 to join our new AWM Insights Network.

EPISODE HIGHLIGHTS:

• (0:40) The data shows chasing past performance is not a good strategy.
• (1:30) It is natural to seek out the best and pursue some advantage through skill or talent.
• (2:00) What is missed by the industry is reporting on the best without doing the digging or investigating if the best actually have skill or happen to be lucky. 
• (2:45) Efficient markets make it incredibly difficult to outperform.   
• (3:08) If you find a manager that has outperformed, will they outperform in the future? Do they have some skill that will lead to future higher returns?
• (3:30) Chasing outperformance hurts your returns and the growth of your wealth. 
• (3:50) Morgan Stanley, Merrill Lynch, Goldman Sachs, and the rest of the brokers built their value proposition on being able to allocate your money better than anyone else.
• (4:33) The data provided by SPIVA illustrate the terrible odds of betting on US Large Cap managers to outperform their benchmark. 
• (5:24) The data shows only 15% can outperform the index so why not find that 15% who can outperform. The problem is there is no predictable way to find the outperformers ahead of time.
• (6:46) Are there other criteria that can be targeted besides just indexing and taking market returns?
• (7:10) There are funds and ETFs that are thoughtful about avoiding the inefficiencies of the index. Avoiding the pitfalls of indexes can be done in a systematic way.   
• (7:56) There are different segments of the market that can offer higher expected returns compared to indexes over long periods of time. The evidence is strong in the persistence of these factors or dimensions of returns.   
• (9:23) If the most elite fund managers can’t outperform with all their resources, you are at an even bigger disadvantage when a financial advisor is doing the stock picking. 
• (9:45) With advisors that are actively stock picking, it's equivalent to going from the NFL to high school or MLB to high school ball.  
• (10:20) Persistence, or the ability for the best to stay the best, is not there in the public markets. Only 21% are able to stay at the top just five years later.           
• (12:23) It is eye-opening for any investor that looks at the data in this area. It is not intuitive and goes against common sense in other areas of competition (especially in sports) but the evidence is clear and year in and year out continues to validate the lack of persistence.       

When markets are down, it is natural to be concerned. Who determines these big moves in the market and what information can we learn from them?

Every transaction in the public market needs a buyer and seller. The transaction they make is reported and publicly available to access.

The market these buyers and sellers compete in is an extremely competitive and highly efficient marketplace. New information is incorporated into prices virtually instantaneously. Current prices reflect the collective knowledge and wisdom of an entire globe of educated and intelligent people competing relentlessly against each other.   

Have questions for an upcoming episode? Want to get free resources, book giveaways, and AWM gear? Want to hear about when we release new episodes? Text “insights” or the lightbulb emoji (💡) to Brandon at (602) 704-5574 to join our new AWM Insights Network. On an iPhone? Click HERE to join.

EPISODE HIGHLIGHTS:

• (0:15) Markets are volatile right now and can be unnerving. How should you go about investing in times like this? Is there anything I should be doing? 
• (1:18) How is market pricing determined and what assumptions can I take from these prices?
• (2:15) Public market prices are easy to look up and are quoted daily in the news. The S&P, Dow, and NASDAQ are the most commonly referenced.
• (2:50) The benefits of public markets with their liquidity and accessibility are also detrimental when markets become volatile. It is hard to ignore the headlines even for informed long-term investors.   
• (3:29) Market pricing is determined by a buyer and a seller. Millions of stock market transactions are completed every day. 
• (4:18) Markets are not perfectly efficient but markets are extremely competitive these sellers and buyers are setting prices.
• (4:48) In 2021, there was $775 billion dollars worth of trades.
• (5:24) War is going on and inflation has been impacting markets and reacting to new information virtually instantaneously.
• (6:00) Efficient markets don’t mean prices are correct, it actually means the current price is the best estimate of the collective wisdom of market participants. 
• (7:20) An example is valuing Apple’s stock. There are 100s of analysts whose sole job is to accurately estimate the price of the stock. The numbers show even someone fully dedicated to figuring it out is usually wrong. 
• (8:30) Market information in public markets is regulated and insider trading is illegal. People are put in jail pretty often for using this competitive advantage to gain an edge. 
• (8:50) Investors as a group are very good at estimating using collective knowledge to pool all guesses together and the average ends up very close. Individually, the estimates are not close.   
• (9:30) Guessing the number of jelly beans in the jar is a classic example of the wisdom of crowds to find the right number.      
• (11:03)The model of using the power of markets and the wisdom of crowds to determine price leads to a better investing experience. 
• (11:30) Focusing on what you can control and listening to the evidence affords you the ability to spend your time and energy on areas where you can create value and impact.       
• (12:25) Next week will be on resisting chasing past performance. One of the most difficult things to do as an investor. 

In last week’s episode, Brandon and Justin started the discussion on real estate investing – hitting on topics like where and how to invest, public vs private, and types of properties. With the foundation now laid out, they dive deeper this week into how to actually go about investing and assessing whether you’re getting the returns you deserve.

They continue their conversation by focusing on private real estate investment and covering how to think through real estate investment deals, finding specialized help, and understanding the trade-offs between investing on your own or investing in a fund.

Have questions for an upcoming episode? Want to get free resources, book giveaways, and AWM gear? Want to hear about when we release new episodes? Text “insights” or the lightbulb emoji (💡) to Brandon at (602) 704-5574 to join our new AWM Insights Network. On an iPhone? Click HERE to join.

EPISODE HIGHLIGHTS

• (1:45) Refresher on the types of real estate investments
• (3:48) Focusing on private real estate
• (5:00) What does the due diligence process look like to vet deals?
• (5:55) What stage is the property in?
• (6:48) What’s your edge?
• (7:43) Identifying value add properties – what improvements need to be done?
• (9:20) The opportunities and tax implications of development projects
• (11:06) Finding diversification through a fund
• (12:08) Promoter carried interest and hurdle rates 
• (13:38) Understanding the costs of property and asset management
• (15:29) Finding specialized help
• (17:00) The importance of a good banking relationship

Real estate is a popular asset class and a huge wealth builder for many people. What are some ideal ways to approach investing in real estate? What can you expect for returns and what are the risks? 

If you are directly buying properties and expect mailbox money without any work, you are in for an unpleasant surprise. A common misconception in real estate is the idea of this passive income. However, owning properties is akin to running a business, and you will either have to do the work or you will receive below-market returns. 

If you don’t want to be a landlord (and have to deal with clogged toilets) but still invest in real estate, there are a multitude of vehicles that satisfy the objective. Real Estate Investment Trusts (REITs) are the simplest option and can deliver truly passive income. 

There are also private funds for real estate that require adequate due diligence but offer the possibility of higher returns than public market options. There can be tax benefits built into these funds as well. 

Returns in private real estate are nowhere close to venture capital, but the sources of returns are also different. Over the last 25 years, those returns have averaged 8.12% annually.

In this week’s episode, Brandon and Justin discuss all things real estate investing and detail the avenues you can use to invest in real estate and what your expectations for returns should be.

Have questions for an upcoming episode? Want to get free resources, book giveaways, and AWM gear? Want to hear about when we release new episodes? Text “insights” or the lightbulb emoji (💡) to Brandon at (602) 704-5574 to join our new AWM Insights Network. On an iPhone? Click HERE to join.

EPISODE HIGHLIGHTS:

• (1:05) Is the only way to invest in real estate to go out and buy a property and manage it myself?
• (1:19) There are many options to invest directly and indirectly in real estate. There are many vehicles and different options for accessing this asset class with some requiring zero work. 
• (1:32) Real estate investment trusts are the simplest and least complex way to invest in real estate. A REIT has a ticker symbol just like a stock and trades on a market exchange. 
• (1:51) REITs generally have a niche or focus of their real estate strategy. It could be a specific area like industrial, office, commercial, residential, or multifamily.   
• (2:24) There are also private market REITs. The only material difference being they are not publicly traded. This makes them less liquid.
• (2:42) Real estate funds are another option to invest in real estate. There are a lot of options in this area due to the size of the global real estate market.
• (3:38) Everyone wants passive income and a lot of people think real estate is the only way to create passive income. Going out and buying a property and managing that property isn’t very passive.
• (4:07) Buying a REIT ETF or individual REIT in the public market is actually passive because you don’t do anything and just collect the income and price appreciation from the investment.
• (4:44) Most real estate is an income-producing investment. Income is the primary goal and price appreciation is secondary. Real estate doesn’t hold a monopoly on passive income and many other assets produce reliable income. 
• (5:40) The misconception about directly investing in real estate is that there is no work involved and once you own the property you can collect the “mailbox money”. This isn’t true and the work involved is akin to running a business. 
• (6:10) Being a landlord and managing an efficient operation takes time, effort, and capital. 
• (6:21) Real estate can be a form of passive income. Investing overall for the long-term, no matter the asset class is passive income. It’s building an investment asset base for the future to create income. 
• (7:10) Passive income or passive growth of your investments is found in many places. If you buy a stock in your brokerage account like JP Morgan. They pay you a dividend every quarter and you didn’t have to do any work but buy their stock. Their share price is also expected to increase, which you could then sell when you need the cash.
• (9:07) Residential real estate investing includes single-family and multifamily projects. Multi-family is usually apartment buildings or houses with multiple units.   
• (9:45) Industrial real estate can be anything from Amazon warehouses to the many storage unit operations. These are very large properties and a competitive market.           
• (10:20)Commercial real estate represents both retail and office space. This encompasses shopping centers all the way to massive skyscrapers full of offices. 
• (10:38) Evaluating whether an investment is worth it involves boots on the ground and projecting the costs that will incur to get a building up to code or navigating environmental issues to get the rents to satisfy investors' required rate of return. 
• (12:11) How should you look at the rate of return you deserve when investing in private real estate? 
• (13:06) Cambridge associates puts together a private real estate index and over the last 10 years the index has returned 11.2% annually and over a 20-year time frame, it has returned 7.8% annually. For 25 years the return is 8.12% annually. 
• (13:50) Private real estate is not the best performing asset class. The data and evidence is clear on this.
• (13:58) Real estate is very dependent on leverage. You borrow money to purchase a property. This means taking on debt to boost returns. This is a double-edged sword because when returns are bad the leverage boosts them to the downside.
• (14:39) Most people think it would be ridiculous to take out a loan to invest in the stock market. But that’s exactly what you are doing when you get a mortgage and invest in real estate. If things go poorly, the bank takes your real estate.
• (15:40) If you’ve decided to invest in real estate, start with the public market premium of a comparable REIT index. You then should be compensated if you make a private deal for an illiquidity premium. This is extra compensation for tying up your money for a long period of time. Going through this exercise will help you decide if a property is a worthy investment.

Investing in private equity (PE) boils down to buying ownership in non-publicly traded companies. Venture capital is just a small subset of private equity and sometimes the lines can be blurred between the two. Within Private Equity, there are multiple niche areas where the PE funds and managers put their focus. Private equity also deals with more mature or later-stage companies than venture capital.

Expected returns in private equity are much different than venture capital, normally with less downside at the cost of the potentially bigger upside. Access to the best PE managers and funds still matters just as it does in VC.

In this week’s episode, Brandon and Justin go deeper on what it looks like to invest in private equity deals, how it’s different than venture capital, and why deals should ultimately be vetted by an experienced investment team to avoid most or all of the returns going to managers rather than you.

Have questions for an upcoming episode? Want to get free resources, book giveaways, and AWM gear? Want to hear about when we release new episodes? Text “insights” or the lightbulb emoji (💡) to Brandon at (602) 704-5574 to join our new AWM Insights Network. On an iPhone? Click HERE to join.

EPISODE HIGHLIGHTS:

• (0:58) How is private equity different than venture capital? What are the expected returns in private equity? How do I have success in PE?
• (1:16) VC or venture capital is a subset of Private Equity or PE. Private equity is an entire ecosystem of non-publicly traded companies.  
• (2:30) Private equity can be much more mature companies and sometimes have been around for decades.
• (3:01) Later stages of venture can bleed into private equity as startups turn into much larger and mature companies. Hedge funds have also been getting into PE.
• (3:33) Private equity is incredibly well-diversified across different types of companies. Venture capital is almost always focused on tech.
• (4:22) Private equity firms sometimes come in and buy a company that is public they view as not performing optimally. The PE managers come in and take the company private. An example of this right now is Twitter.
• (4:46) The stage of the company doesn’t always mean funding size. Mature companies aren’t always bigger.
• (5:25) Middle market private equity is sometimes family-run and geographically focused businesses. Helping owners hire a CEO and exit the company is what they try to solve. 
• (6:00) Return profiles are vastly different for venture capital and private equity. Early-stage venture capital is the riskiest and therefore has the highest expected returns. It also has the largest range (dispersion) of returns. Something can 10x or go to 0.
• (6:40) Private equity returns are not like VC. Most of the companies at least return what you put in. The upside is also limited, at least when compared to VC. It might be a 4x for a best case, base case a 2x, and downside return of .9x. 
• (7:30) Venture capital funds wouldn’t take a best-case return of 4x like is targeted in PE because it’s not enough return to justify the risk.
• (8:40) The drivers of returns for PE are also much different than VC. A lot of the value-add from the PE firms comes in the form of financial engineering and improvement of operations.
• (10:40) How do you access the best private equity?
• (11:10) The access and specialty of the firms still matter in PE just as they do in VC. The persistence of returns from the best funds is not as persistent as venture capital but is still there.
• (12:14)Relationships and what value a limited partner can add will win a lot of deals. Athletes have been able to gain access to exclusive deals because of what they offer besides money.
• (13:40) There is pressure when owners take money from private equity. This money comes with expected results. 
• (15:09) Staying private and growing without PE money allows for independence and the ability to avoid conflicts of interest from outside managers that may not have the same goals as the original owners. This is very important in the wealth advisory industry. 
• (15:40) Companies that have sold to private equity have pressures to grow and sometimes that comes at the cost of clients.

There are around 2,000 venture capital firms managing about 4,000 funds. It’s a small market in the grand scheme, but many aren’t worth investing in. The return difference between the top 25% and bottom 25% is staggering. 

This is a game of professionals. It’s no different than elite athletes competing at the highest level in professional sports. The same separation of talent exists in the venture capital arena. Investors with the best access look for 5x or more in returns. 

What else does it take besides capital to invest in venture? Are you an accredited investor or a qualified purchaser? Are you investing as an individual or an LLC? Are you making directs, allocating to funds, or even diversifying into a fund of funds strategy? Justin and Brandon give you the details on how the whole process works. 

Have questions for an upcoming episode? Want to get free resources, book giveaways, and AWM gear? Want to hear about when we release new episodes? Text “insights” or the lightbulb emoji (💡) to Brandon at (602) 704-5574 to join our new AWM Insights Network. On an iPhone? Click HERE to join.

EPISODE HIGHLIGHTS:

• (1:02) How do I find the next all-stars and Hall-of-Famers in venture capital?
• (1:45) It is difficult to find the best-performing managers, funds, and even more so portfolio companies. And you are only rewarded if you can get into the best ones.   
• (2:18) There is persistence in the data. This means the best managers in VC are able to repeat their performance. This is NOT like the public markets and their managers.
• (3:03) A different ecosystem in the venture space creates the opportunity to keep outperforming. Informational asymmetry and access to top-tier networks are the most significant drivers of persistent returns.
• (3:32) Is a VC manager going to keep outperforming his competitors?
• (3:55) Just getting access and an allocation to the small group of winners can be extremely difficult.
• (4:50) If someone is banging down your door to invest in their fund, that’s a red flag. The best funds returns speak for themselves and don’t need to search for capital.
• (6:40) When you finally decide to invest in a fund as a limited partner, what happens then?
• (7:00) You must be an accredited investor and many of the top funds require you to be a qualified purchaser.
• (7:16) Next, you need to read and sign a lot of documents including an operating agreement that establishes the role of the general partners.
• (8:08) A lead investor or anchor investor is the person or group that takes the largest stake. They help negotiate and establish parts of the partnership agreement. 
• (9:16) How are you coming in to invest, are you an individual, trust, or LLC? 
• (10:12) What is a fund of funds structure? A fund that can get access and diversify into many different VC Funds. 
• (10:49) Trade-offs for fund of funds are possibly lower rates of return because the diversification caps your upside on the winners. The expenses also reduce returns to you the investor.
• (11:40)Venture capital funds look to return 3x to their investors. To get that kind of return with the fees charged, VCs must find companies that can do greater than 10x before fees.
• (13:56) Venture capital’s return profile is called a J-curve. 
• (15:32) In a perfect scenario, the venture investment turns into a hockey stick and goes mostly vertical before the exit.
• (16:00) What are the fees in venture? Usually 2% of committed capital and a “carry” of 20% of profits on the exit. 
• (17:11) A $9M appreciation in a portfolio company would deliver $1.8 million to the VC and $7.2M to the investors. This is the carry and why so many smart, competitive people are in the space.
• (18:22) The best VC firms can be selective with who they allow as limited partners. 
• (18:44) Just being a professional athlete is not enough to get an allocation to top VC funds. What else do you bring to the table to help achieve a successful outcome?
• (19:04) If you’re an athlete can you provide a unique way to add value to venture firms? 

Why would a founder raise money? 

To turbocharge growth of the company. The company can grow faster from taking outside capital. In exchange, the founder is giving up partial ownership of the company. 

What should investors be looking for?

The majority of companies in venture fail. It is wise to be skeptical and thorough. It isn’t enough to see a teaser pitch deck and start writing checks. Access to the data room and diligence in reviewing financials, management team, and legal documents leads to better outcomes.     

The best venture capital investors and founders look for a win win scenario. The VC investors get outsized returns and the founders get to build and grow their startup into a successful, sometimes dominant business. They also usually exit with millions or sometimes billions in liquidity.

Have questions for an upcoming episode? Want to get free resources, book giveaways, and AWM gear? Want to hear about when we release new episodes? Text “insights” or the lightbulb emoji (💡) to Brandon at (602) 704-5574 to join our new AWM Insights Network. On an iPhone? Click HERE to join.

EPISODE HIGHLIGHTS:

• (0:55) Why is a founder raising capital? What is the money for?
• (2:00) A venture company doesn’t have to raise outside capital but to grow and scale to become 
• (2:22) Venture capital and tech are synonymous.
• (2:47) Deciding how much money to raise is a tough question for a founder. The more money a founder asks for the more ownership he or she will have to give up.
• (3:15) Owners and founders try to minimize their dilution of ownership.
• (3:50) Current market conditions are a big factor in to how much to raise and the valuation a company can raise money at.
• (4:41) A founder and client who just raised money before the market tightened is setting strategy on how fast to use the capital. Using the capital will create more growth but will also lead to the need for another fund raising round fairly quickly.
• (6:10) Example: A Web 3.0 company is trying to raise a $100 million at a $500 million valuation. For the math to work and to return a 10x, the company would need to be valued at $5 billion in the future. It is very difficult to create a company that grows to that kind of valuation.
• (8:05) You must be thorough. A teaser deck is often what you see being sent around to get you interested. An investment should never be made off this incomplete information usually produced by the marketing team of the company.
• (9:05) Investing directly in companies and their founder is very similar to investing in venture capital funds. The due diligence if requirements are very similar.
• (9:31) A data room is created, usually hosted in the cloud, and access is granted to investors to be able to download and review.
• (9:42) Financials with revenue and expenses, the formal pitch deck, legal documents, and information on founders are normally in the data room.
• (10:40) Proper time and research needs to be spent reviewing this information and being skeptical can save you from making poor investments. 
• (11:50) Reviewing a teaser deck is not enough to decide whether to risk your money. 
• (12:47) If you get an opportunity to invest in an early stage company, immediately gather more information. Just asking for access to the data room will weed out a lot of the pretenders.    
• (13:42) Venture capital as an asset class has been very good in recent times for investors. 
• (15:12) Individual investors shouldn’t be making investments directly into startup companies. These direct investments take an incredible amount of time, experience, and resources to be successful. The better way to participate is through venture capital funds.

You’ve decided to jump in to private investing. You’ve already asked yourself if you should invest at all and discovered how to participate. Now that you’re ready to invest - how does it actually work? Who is giving money to whom and what are they trying to achieve?

First, you start with a venture capital founder - an entrepreneur that starts a company with an industry-disrupting idea. Think Zoom, Peloton, and Coinbase as recent examples. The company must grow, scale operations, and eventually become profitable to become successful.

Second, the Venture Capital Firm (VC) - a group of people who specialize in finding the next trillion-dollar company before they even have profits - funds the founder with the capital necessary to realize their potential. In exchange, they become equity owners of the business and work in partnership with the founders to increase the chances of success. Some of the most well-known VCs include Accel, Bessemer Venture Partners, Lightspeed, Sequoia, IVP, Benchmark, and a16z. 

Third, the investors, like AWM and other family offices, then put money to work with venture capital firms to target the outsized returns. 

The ideal end result is an exit (sale) that generates for the investors, VCs, and founders an outsized return. Without the idea and execution, the VCs and investors would not be able to capture this return. Without the capital invested, the company would fail.

In this week’s episode, Brandon and Justin dive deeper into this process on how the venture capital investing works, the different seed and funding rounds, and what to expect throughout as an investor.

Have questions for an upcoming episode? Want to get free resources, book giveaways, and AWM gear? Want to hear about when we release new episodes? Text “insights” or the lightbulb emoji (💡) to Brandon at (602) 704-5574 to join our new AWM Insights Network. On an iPhone? Click HERE to join.

EPISODE HIGHLIGHTS:

• (1:15) Who are the players in venture capital? Who are the players in these deals?
• (2:03) Venture dates back to post-World War 2 with wealthy families investing in very early companies. 
• (2:22) The venture capital managers specialize in finding the best new companies. The VC aggregates money from investors and searches for portfolio companies to make investments in.
• (2:33) RIAs and family offices, like AWM, deploy capital to these venture capital managers to find outsized returns.
• (3:05) The maturity of the company is divided up into seed, early, and growth stages. A company will usually raise money multiple times before it IPOs, is acquired, or fails.
• (3:36) The other key player is the entrepreneur. This is the company founder(s) that have a great idea or business model and needs capital to make the business successful.
• (5:10) There are different flavors of venture capital managers. They usually specialize in a niche or maturity level of the company.
• (5:30) In general, venture capital is high-risk high reward. Most small businesses are not considered venture capital. Venture capitalists are looking for companies to generate outsized returns.
• (6:30) The earliest stage of venture capital is angel investing, pre-seed, or friends and family. The next stage is generally called the seed round. 
• (7:20) After the seed round, they start calling the funding rounds A, B, C, D, and even sometimes E and F. 
• (8:50) Most venture capital first stays in its sweet spot and focuses on a certain maturity stage of portfolio companies. 
• (9:02) The investors (VCs) are making a bet that the founders will take the money (capital) and grow the business and sell it in the future for a much higher price.
• (9:37) The founder or entrepreneur knows they need the capital to grow and invest in the invested capital in right people and resources to help the company continue to grow. 
• (10:46) The marketplace is getting more competitive when it comes to how venture capital firms can add value to the founders and help increase the chances of success.
• (11:22) The best VC funds knock it out of the park, the worst VC funds do worse for investors than the public market. This is why understanding the dispersion of returns and getting access to the best managers avoids the crap of Silicon Valley.
• (12:05) Founders picking VC firms to work with and investors deploying the capital to VC firms know there is persistence or repeatability by the best firms in VC. This makes getting access to the best difficult and competitive.
• (13:00) Founders with the best ideas will take capital from many of the best VC firms to gain the diversity of thought and value that can be gained from the VC's expertise. 
• (13:35) An example is if you are a young cloud company you would want to partner with Byron Deeter and Bessemer Venture Partners because of his expertise and track record.
• (14:24) There is a lot of money chasing Venture Capital right now because it is sexy and easy to sell. It is hard to get into the top funds and the top funds are even reducing LPs to maximize their relationships.

Last week, Brandon and Justin answered the question “Should I Own Private Investments?” In that episode, they gave a framework to consider before an investor jumps into the private markets. This week we continue our private markets series by answering the question of How to participate in the private markets.

Private equity consists of all the companies that are not publicly traded. These companies are too new or too small to trade in the stock market. Private debt is just the bond equivalent in the private world. It is a very broad world of investing and carries different sources of risk but the potential for higher returns.

Venture capital is one subsection of private equity and focuses on early-stage companies that are looking to change the world with new technology, ideas, or business models.

Private equity can be mature companies that are bought to improve efficiency, operations, and financial structure. These companies can even be publicly traded, then bought out, and taken private. We’re seeing this in the news now as Twitter has apparently accepted Elon Musk’s bid to buy it.

Private real estate is another massive area of private investing. These private real estate deals can be used to produce income, capital appreciation, or a mixture of both. The key is to know the tax implications and do the tax planning ahead of time. 

Private investments are an area a capable team can add significant value by providing the resources and the analysis necessary to do it well, but what are the areas you should be aware of before you jump in? Join Brandon and Justin in this week’s episode as they discuss.

Have questions for an upcoming episode? Want to get free resources, book giveaways, and AWM gear? Want to hear about when we release new episodes? Text “insights” or the lightbulb emoji (💡) to Brandon at (602) 704-5574 to join our new AWM Insights Network. On an iPhone? Click HERE to join.

EPISODE HIGHLIGHTS

• (1:20) Venture Capital is one subsection of private equity that has been rewarding for investors in the past. The highest historical returns have existed in early-stage venture capital.
• (2:30) Venture investing is simplified as becoming an owner in startup companies. These companies are disruptors and you’re backing new ideas or business models.
• (2:55) Different Stages of raising money: angel, pre-seed, bridge, series a, b, c, d. These rounds line up with the maturity of the company.
• (3:50) These companies need fresh capital because in the early stages they are not usually profitable. Once the business matures, they normally look to exit in a liquidity event. Possibly an IPO or an acquirer.
• (4:00) Private debt is another area of private investing. Rather than sell equity in their company, the company can take on debt to finance their operations.
• (5:20) Twitter is a good example of a company that is publicly traded but could be purchased by Elon Musk and taken private.
• (7:18) Private equity usually buys mature companies, takes on debt, and tries to improve operations and financial structure of the company.
• (8:40) 40% of publicly traded companies have been venture backed since 1980, and over 50% since 2000.
• (9:40) Private real estate is massive and is more than just the shows on TV that usually involve flipping residential housing.
• (10:10) Residential real estate investing returns are not very good because of the amount of competition. The juice isn’t worth the squeeze here.
• (10:26) Better areas of real estate investing can be found in multi-family, commercial, and industrial. These areas better compensate investors in the long-term.
• (11:15) Various stages of these markets exist. Value-add, income producing, farmland, and developmental land all have different intricacies.
• (12:25) Understanding tax impacts of different real estate investments is crucial. Income producing properties will be taxable at ordinary income rates so normally won’t make sense for those in the top tax brackets.
• (14:05) In private markets, you must do all the due diligence yourself. It’s an uphill battle and takes time and experience to become proficient.
• (14:45) If you don’t have an advisory team that can do the analysis of these private deals be very cautious. You will have to do the due diligence of reading through the reports, requesting data room access, and making the call on whether the potential reward is worth the risk.
• (15:20) For those that have built a strong financial structure, private investments can be a good place to take compensated risks for the potentially higher expected returns. 

Just because you qualify on paper for private investments doesn’t mean you should have them in your portfolio. Ignoring current spending and future income can lead to poor results that can and should be avoided. Just as Maslow created the “hierarchy of needs,” portfolio construction can follow a similar pyramid. Liquid assets reside at the bottom and illiquid (private investments) at the top. Investing for your priorities in alignment with a strong financial structure will increase the chance of achieving the outcomes you desire. 

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EPISODE HIGHLIGHTS:

• (1:21) What is private investing vs public markets? Should I be investing in private companies?
• (1:44) Many private investments are sold to people without a full understanding of the risks. 
• (2:23) Why invest in the private side? Data shows higher expected returns! 
• (3:27) The range of returns is very very wide. This variance of returns is the norm in private deals.   
• (4:01) Public market managers do not have this same dispersion of returns.     
• (4:50) “Every single company is a technology company whether they like it or not” is a common saying in private markets.   
• (6:11) Why invest in private companies if the downside could be so bad?   
• (6:35) With more risk, comes a higher expected return. 
• (7:05) Buying ownership in companies that are just starting out. This is especially true in venture capital which has a high failure rate.       
• (7:55) LIquidity is the ability to sell your investment with little time and cost to get the money. Publicly traded stocks are very liquid.
• (8:39) Everyone has the same information in public markets. If not, that is insider trading and people go to jail for that. This isn’t the case in Private Markets. Smart investors want an information advantage. 
• (9:10) Information is king and access to the best information leads to the ability of the best to continue to outperform. There is no requirement to equally distribute public information.       
• (10:20) Who can and should invest in private markets?     
• (10:40) The SEC also regulates private securities and you must be an Accredited Investor or Qualified Purchaser to even be legally allowed to participate.
• (12:06) Illiquidity or locking your money up for 5-10 years is a trade-off of private investments.     
• (13:10) Important priorities including your essential spending need to be sufficient before you can commit to these illiquid investments.   
• (14:08) The investment “hierarchy of needs” in portfolio construction is a good analogy to think of when working your way up to private investing. Venture capital lives at the top of the pyramid.     
• (15:09) According to the SEC, two people with identical situations could technically qualify to invest in private investments. But that ignores the priorities and spending of the family. They may spend so much per year that they cannot afford to have their capital locked up for 5 or 10 years in the private deals.   
• (16:56) Your financial structure has to be set up to invest in these opportunities that can take up to 15 years to reap the rewards.