At IRA Innovations, a significant number of our clients invest in private placements with their self-directed IRA, and interest in this area has grown over the past few years. This post will be dedicated to looking at what exactly private placements are, why you should or should not consider this type of investment, and other considerations surrounding private placements.
What is a private placement?
A private placement is a privately-held entity that is not publicly traded on any exchange. This includes various types of funds (i.e. hedge funds), LLCs, partnerships, promissory notes, pools of property investments, loans, businesses, and more. Generally, investors hear of private placements through their financial advisors, attorneys, or more recently, through investor clubs and even the internet.
Private placements are offered to a relatively small number of select accredited investors as a way of raising capital. For those seeking funds, obtaining capital from a self-directed IRA owner can be simpler and faster than going through the more traditional loan process with institutional lenders. For self-directed IRA owners, this type of lending has the potential to bring higher returns than the stock market or CDs.
Private placement investing process
The process starts with a Private Placement Memorandum (PPM), which is a document used to entice the investor into the particular opportunity being offered. It discloses everything an investor needs to know to make an informed investment decision. As an investor, you have the opportunity to review this document to make sure this is the investment decision you want to make.
This is where due diligence really comes in and why it’s so important before investing in a private placement. Some entities do not allow investors to sell or withdraw funds for a fixed amount of time. This can be especially important if you are close to retirement. Make sure this will not interfere with your required minimum distributions.
We also want to note that private placements are not a very liquid option, and there are often some restrictions. But, it does often work for many investors. Just remember that this is often a long-term strategy.
Challenges with private placement investing
Investing in private placements is highly controlled. Most — but not all — of the private placements are only available to accredited investors. In order to qualify as an accredited investor in the U.S., the individual must meet at least one of the following criteria under the Securities Act of 1933:
- Earn an individual income of more than $200,000 per year or a joint income of $300,000 in each of the last two years and expect to reasonably maintain the same level of income
- Have a net worth exceeding more than $1 million, either individually or jointly with spouse
There are some exceptions to the above, and the private placement market has steadily been opening up to more investors.
For those who are willing to take more risks with their investments, and for those who feel they are well-informed about the private placement market, it can really be a win-win situation. The private placement owner, such as a start-up business owner, gains access to the capital they need. You gain the potential to reap a higher return on your investment and have the opportunity to significantly diversify your retirement portfolio.
For more information about investing in private placements with your self-directed IRA and for help getting in touch with financial advisors and others who can help you find the right investments, contact us today.
Learn more about the basics of self-directed IRAs from IRA Innovations in Birmingham, AL.
IRA Innovations provides self-directed retirement account administration and education in Birmingham, AL, Tuscaloosa, AL, and Nashville, TN. As the experts when it comes to “alternative” investments including private equities, they can provide the necessary tools and information to get started with a real estate IRA.