Private Equity Meets Stock Market
In this article, I will explore options for wealth-building, as well as how to best maximize wealth. I will also offer my own opinion on whether Wall Street or Private Equity investing is better; spoiler alert – I prefer Private Equity over Wall Street.
Right off the bat, I think we would all agree that one of the most common ways to stay ahead of inflation and to grow our money is to invest in the stock market. We all know that the market’s primary benefit is simply that over long-term, the stock market value trends up based on stability and growth of the companies in which we invest. At the same time, the most noticeable detractor is that in short-term, individual stocks may fall, as in the stock market plunge in 2008 or during the latest example of volatility at the end of 2018, when a stock market correction likely negatively impacted your stock portfolio by at least 10-20%.
So allow me get to my point. If you’ve read some my prior articles, you already know that I am an advocate of diversification, and my favorite solution for neutralizing negative short-term Wall Street losses while growing wealth is direct investments in real estate via syndication. But the term, “private real estate investing” is often confusing, so allow me to explain the terminology and unpack the various investing venues outside of Wall Street.
Wall Street (Public Equity) Investor
Individuals or organizations that buy ownership in company shares through a public stock market.
Venture Capital Investor
VCs, short for Venture Capitalists, are similar to hedge funds that you see on Wall Street, and the main difference between the two is that VCs invest in pre-IPOs, while hedge funds invest in existing companies. VCs are usually private investors or, sometimes development finance houses or venture capital firms, that provide growth equity capital or loan capital to startups in exchange for equity in the startup. Venture Capital is also known as risk capital because it usually funds high risk and high growth financial portfolios in technology industries such as biotech and software.
Angel Investors are individuals who invest their own money in an entrepreneurship, and typically these are the earliest investments in startup companies. Angel investors usually group together in networks comprised of wealthy individuals. More likely than not, these networks focus on a specific industry or region. Angel investors are also often former successful entrepreneurs, and they typically enter at the very beginning stages of a business, and even before a marketable idea is fleshed out.
Private Equity Investor
Private equity is capital that is not listed on a public exchange. Private equity is composed of funds and investors that directly invest in private companies. Investors provide the capital for private equity, and the capital can be utilized to fund new technology, make acquisitions (like real estate) or expand working capital.
Private equity investors usually buy companies or as in my case, real estate that are established and mature. A company may not be as profitable as it should be, and Private Equity investors streamline operations to increase revenues after buying such company.
Based on the above basics, I want to focus on a very important point. Do not confuse Private Equity investing with Venture Capital and Angel Investing. Although all three invest in private companies and later exit by selling their investments in the company’s equity, VCs and Angel Investors actually have very little commonality with Private Equity Investors. Upon a closer look, VCs and Angel Investors are more synonymous to stock traders. VCs and Angel Investors mostly invest in multiple high-risk and high-growth early start-ups, which is analogous to throwing darts at a dartboard in the dark. The payout is awesome if you hit a blockbuster bullseye, and the downside is that it’s unlikely.
This brings me back to my opening statement in this article; I prefer and recommend investing in Private Equity Real Estate due to its balance of wealth preservation, tax saving strategies and income-producing real estate. But just to drive the point home, let’s further compare Private Equity performance to Wall Street returns.
As part of my research into the topic of Private Equity Vs. Wall Street performance, I reviewed several research papers and articles that compared private equity fund performance to stock market returns. I wasn’t surprised to learn that since the 2008 recession, stocks were outperformed by real estate Private Equity investments, such as in multifamily, self-storage and/or mobile home parks, which bring in positive monthly cash flow, as well as allow to build wealth over time.
Another benefit to Private Equity Real Estate investing is minimal risk. According to research, 40% of stocks experience a 70% or greater drop from their peak value, which is often irrecoverable. In comparison, only 3% of private equity investments experience a similar loss.
As I already mentioned, we saw a stock market correction more recently at the end of 2018, and in today’s volatile stock market, investment analysts are continuing to predict a Wall Street decline.
Be smart with your hard-earned money. Protect it by preserving your wealth. Diversify. Build passive income.