In this episode of Retire with Style, Wade Pfau and Alex Murguia explore the world of alternative investments, with a focus on private equity and private credit. They discuss what it means to be an accredited investor, the different types of private equity investments, and the typical life cycle and structure of private equity funds—including the roles of general and limited partners.
The conversation also covers key risks, such as liquidity constraints and valuation challenges, and explains how private investments can fit into a broader retirement income strategy. Wade and Alex highlight the growing accessibility of these investments for retail investors, the rise of private credit markets, and the relationship between volatility and expected returns—underscoring the importance of understanding risk when evaluating investment decisions. Listen now to learn more!
Private Equity
Private equity involves investing in private companies rather than publicly traded stocks.The main types of private equity are venture capital, growth equity, and buyouts.These funds typically follow a seven- to eight-year life cycle and are structured with general partners (who manage the fund) and limited partners (who provide capital).Carried interest is a key component of compensation for general partners.Liquidity is a major concern—investments are often locked up for long periods.Valuing private companies is often opaque and can mislead investors.In venture capital, most returns come from a small number of successful investments.Private equity can provide diversification benefits in a broader portfolio.Private Credit
Private credit focuses on lending, often to individuals or private firms, and is distinct from private equity.These investments are gaining popularity, driven by institutional demand and the search for yield.Platforms like iCapital are increasing access for individual investors.Private credit can offer higher yields than traditional fixed income but also comes with unique risks.Investment Strategy and Risk
Alternative investments are growing in popularity, especially among individual investors.Risk and return must be evaluated together—volatility alone does not guarantee higher returns.Effective portfolio construction requires understanding how different asset classes interact.Investors should avoid diversifying blindly and instead understand the specific risks of each investment. 00:00 Introduction to Alternative Investments
04:25 Understanding Private Equity
10:27 Types of Private Equity Investments
18:52 The Private Equity Life Cycle
26:36 Structure and Function of Private Equity Funds
28:08 Risks and Considerations in Private Equity
29:15 The Illusion of Valuations
31:43 Democratization of Investment Access
32:12 Understanding Private Credit
35:33 The Growth of Private Credit Markets
41:03 Integrating Private Credit into Portfolios
45:17 Volatility and Expected Returns
Curious about alternative investments but not sure where to start? Join Alex Murguia for the latest Retirement Researcher Academy Workshop: Know Before You Invest: Understanding Alternative Investments and get the clarity you need: https://retirement-researcher.ontralink.com/tl/538
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This episode is sponsored by McLean Asset Management. Visit https://www.mcleanam.com/retirement-income-planning-llm/ to download McLean’s free eBook, “Retirement Income Planning”
