The venture capital crunch may be easing, but it isn’t over yet. That means there could be direct investment opportunities for private deal investors.
Despite a less-than-stellar inflation report in March, consumers are feeling bullish about the economy, pushing venture capital and private equity firms to ready themselves for a re-entry into the market. But before the coming AI wave hits and traditional financiers start moving their money back to the table, private investors have a chance to make their mark.
Capital markets have been in a rough place for the last two years. While 2021 was a banner year for private companies, high interest rates and inflation have all but dried up the investor pool. VC firms have been extremely reticent to take gambles on new companies and founders. Meanwhile, the IPO market has all but ceased, and businesses are hesitant to jump into an uncertain environment.
Fear of a recession has loomed heavily over the economy with everyone taking a defensive crouch, hunkering down to weather the storm.
But reading into Jerome Powell’s comments before Congress earlier this year regarding the future of interest rates, it seems the Fed may believe that the worst of the recession concerns are behind us.
With greater clarity and stability about the year ahead, the market is set to open up in a major way. And that is where private investors of the world are going to make their mark.
Or, at least, they should.
To be clear: The economy isn’t back to booming yet. There’s a light at the end of the tunnel, but it’s still a matter of making it to the other side.
Look at the stock market: The S&P 500 was up 24% at the end of last year — an optimistic sign … at first glance. But given that the growth was largely dependent on the success of the Magnificent 7 big tech stocks, the market may not be nearly as bullish as it seems. Some 493 stocks grew an average of just 12%, whereas the Magnificent 7 were up an average of 111%.
A stock market resurgence it is not.
Private investors can leverage the moment
For investment firms, it’s a macro environment where risk can still be costly and debt is expensive. As a result, it’s private investors with the wealth and cash to play ball who can leverage the moment into major gains.
Anecdotally, we’re seeing investors less interested in taking a major gamble on the stock market. The relative lack of growth and new opportunities aren’t appealing without the return that high-net-worth individuals desire.
Combined with the fact that AI has emerged as the next major technological driving force of the economy, private investors are looking for opportunities to invest in young and private companies. Demand is surging on both the business and investor ends.
Businesses have been operating on scaled-down budgets with pared-down teams (as evidenced by the mass tech layoffs we’ve seen over the last few years). Meanwhile, investors are eager to get in while the market is low.
Direct investments are the solution everyone wants.
The AI market, for example, is the next big thing for companies and investors alike. Private investors can take advantage of these emerging opportunities in the AI space before the debt-dependent capital investment firms get too far out ahead.
Investors need to be realistic about where they’re trying to get involved. While OpenAI CEO Sam Altman may be on a crusade for $7 trillion, it doesn’t mean that the deal will be easy to get in on. Direct investments can be an incredibly lucrative alternative investment strategy, albeit one that requires a significant amount of wealth.
The size of some of these deals can be enormous — requiring anywhere from a quarter of a million, to a million, to even $100 million to participate. In order to even qualify as an investor, many private equity firms have net-worth minimums that need to be met.
But the AI market is booming. Sidecar opportunities, where private investors hitch themselves to a private equity deal, are going to become more prevalent and available as companies like Reddit prepare for IPOs in 2024.
Adviser can help find opportunities
Working with your wealth adviser is key to finding these opportunities; these deals often are a matter of who you know and who knows you, especially on the secondary market. Having a well-connected wealth adviser who gets approached about secondary investment opportunities can give you a big leg up; some firms even stalk down investors to see if they’d be willing to sell.
Your wealth adviser may also be able to connect you with more venture capital-type investment, allowing you truly ground-level opportunities with some companies.
Direct investments aren’t for everyone. To do well, investors need an effective strategy, as well as a discerning eye for business. Everyone wants to find the next unicorn. But the chances of that happening are as likely as your average Little Leaguer making it to the pros.
If you’re going to invest with young businesses directly, it’s best to go into it with your eyes fully open, aware of the risks and pitfalls that are likely to come. Because as a career financial adviser, I can tell you: No deal has ever looked bad on paper. The hallmark of a good founder is being able to sell their vision, while making smart investments is about being able to call BS when needed.
The market is the private investors for the taking. It’s time to seize the moment.
— Thomas Ruggie, ChFC®, CFP® is the founder and CEO of Destiny Wealth Partners. Follow him on Twitter and LinkedIn.
