As accredited investors, individuals or entities may partake in private investments that are not registered with the SEC. These investors are presumed to have the financial sophistication and experience required to evaluate and invest in high-risk investment opportunities inaccessible to non-accredited retail investors. Here are a few to consider.
In April 2023, Congressman Mike Flood introduced H.R. 2797. Called the Equal Opportunity for All Investors Act of 2023, the bill seeks to expand the definition of accredited investors beyond just the affluent to include those who pass a financial competency exam designed by the Securities and Exchange Commission (SEC) and administered by the Financial Industry Regulatory Authority (FINRA). Flood’s bill passed the House in May 2023 with broad bipartisan support and is now being considered by the Senate.
For now, investors must abide by the term’s existing definition. Although there is no formal process or federal certification to become an accredited investor, an individual may self-certify as an accredited investor under current regulations if they earned more than $200,000 (or $300,000 with a spouse) in each of the past two years and expect the same for the current year.
Alternatively, individuals can qualify if their net worth, either individually or with a spouse, exceeds $1 million after excluding the value of their primary residence. Individuals with an active Series 7, 65, or 82 license are also considered to be accredited investors. Entities such as corporations, partnerships, and trusts can also achieve accredited investor status if their investments are valued at over $5 million.
As accredited investors, individuals or entities may partake in private investments that are not registered with the SEC. These investors are presumed to have the financial sophistication and experience required to evaluate and invest in high-risk investment opportunities inaccessible to non-accredited retail investors. Here are a few to consider.
1. Private Equity Funds
Private Equity (PE) funds have shown remarkable growth in recent years, seemingly undeterred by macroeconomic challenges. In the third quarter of 2023, PE deal volume exceeded $100 billion, roughly on par with deal activity in Q3 of the previous.
PE firms pool capital from accredited and institutional investors to acquire controlling interests in mature private companies. Once a PE firm acquires a company, it will try to cut costs, drive revenue growth, or pay down debt. After a three- to seven-year holding period, the PE firm will exit its investment by taking the company public, or by selling it to another private buyer.
Accredited investors looking to in PE should be prepared to commit at least $250,000 and up to several million dollars in capital to each sponsor.
2. Angel Investing
Angel investing is a high-risk, high-reward investing strategy in which individuals or organized investor groups provide convertible debt or equity financing to early-stage companies that are not yet ready for venture capital. In addition to capital, angel investors bring their professional networks, guidance, and expertise to the startups they back, with the expectation of venture capital-like returns if the business takes off.
According to the Center for Venture Research, the average angel investment amount in 2022 was roughly $350,000, with investors receiving an average equity stake of over 9%. In the long run, successful angel investors can achieve internal rates of return (IRR) of between 25% and 35%.
3. Asset-Based Private Credit
The private credit market has seen significant growth in the last few years. Private credit funds’ assets under management (AUM) swelled from $875 billion in 2020 to $1.4 trillion in early 2023, with industry analysts projecting a further rise to $2.3 trillion by 2027.
Asset-backed private credit funds extend secured debt financing to companies in need of more capital than what banks and other more conservative lenders are willing to extend.
Historically, the private credit industry was dominated by institutional investors. That said, the advent of online private credit platforms and niche sponsors has made the asset class accessible to individual accredited investors. Today, investors with as little as $500 to invest can take advantage of asset-based private credit opportunities, which offer IRRs of up to 12%.
4. Grocery Store-Anchored Real Estate
Despite the rise of e-commerce, physical grocery stores still account for over 80% of grocery sales in the United States, making them—and especially the real estate they operate out of—lucrative investments for accredited investors. According to JLL’s Retail Outlook Q2 2023 report, grocery-anchored centers were the most-transacted type of real estate in the multi-tenant retail category in 2023, notching $3.6 billion in transaction volume on a year-to-date basis. In comparison, unanchored strip centers and neighborhood centers, the next two most heavily transacted types of real estate, recorded $2.6 billion and $1.7 billion in transactions, respectively, over the same period.
But what are grocery store-anchored centers? Suburban strip malls, outlet malls, and other retail centers that feature a major grocery store as the location’s main tenant typically fall under this category, although malls with enclosed walkways do not. Grocery store-anchored centers are popular among tenants and profitable for landlords because the grocers that anchor a retail center often generate foot traffic for the center’s smaller tenants. To a lesser extent, this phenomenon is also true in reverse. This uniquely symbiotic relationship between a center’s tenants drives up demand and keeps rents elevated.
Accredited investors can invest in these spaces by partnering with real estate private equity (REPE) funds. Minimum investments typically start at $50,000, while total (levered) returns range from 12% to 18%.
5. Farmland
The value of U.S. farm real estate and cash rent values for cropland saw significant growth in 2023, increasing by 7.4% and 4.7%, respectively, over the past year.
Accredited investors interested in owning U.S. farmland can either purchase plots outright. Those concerned about the high barrier to entry can invest with farmland-focused REPE firms, which require minimum investments of $10,000 or more.
6. Fine Art
Though many collectibles make poor investments, fine art could be an exception. Over the last decade, art has earned average annual returns of 14%, trouncing the S&P 500’s 10.15%. The market for art is also expanding. In 2022, the global art market grew by 3% to $67.8 billion. By the end of the decade, this figure is expected to approach $100 billion.
Accredited investors who wish to invest in art are no longer limited to exclusive auctions or impressive but unaffordable multimillion-dollar masterpieces. Investors can now own diversified private art funds or purchase art on a fractional basis. These options come with investment minimums of $10,000 and offer net annualized returns of over 12%.
7. Venture Capital
Venture capital (VC) continues to be one of the fastest-growing asset classes in the world. Today, VC funds boast more than $2 trillion in AUM and have deployed more than $1 trillion into venture-backed startups since 2018—including $29.8 billion in Q3 2023 alone.
Despite the downturn in VC and startup fundraising activity in 2021 and 2022, PitchBook’s VC Dealmaking Indicator indicates that now is a good time to invest. In particular, early-stage companies have shown remarkable resilience, with seed and Series A startups attracting $7.2 billion, or roughly a quarter of all funds raised by startups in Q2 2023.
VC firms remain the most popular way for institutional investors to gain exposure to this asset class. While large funds impose minimum investments of $50,000 or more, smaller funds catering to accredited individual investors may sport lower minimums. Over the last 10 years, venture capital investments have earned average annual returns of 12%.
8. Hedge Funds
A BNP Paribas October 2023 survey reveals that hedge fund managers and institutional allocators anticipate strong performance from the asset class over the next year and a half. In spite of market volatility, elevated interest rates, and macroeconomic worries, investors now expect hedge funds to post annualized forward returns of 9.75%, up 2.9 percentage points from 6.85%.
In fact, more than 60% of surveyed managers expect to beat the risk-free rate by 6 percentage points or more. This is perhaps due in part to the asset class’ flexibility. Unlike venture capital or private equity firms, which most maintain highly illiquid positions in private companies for several years or longer, hedge funds pair the mark-to-market liquidity of public markets with advanced tactics like short selling, leverage, and arbitrage. By pivoting quickly and employing high-turnover strategies when necessary, hedge fund managers can generate consistent and outsized gains in both rising and falling markets.
That said, investment minimums are also high and typically range between $100,000 and $2 million. Accredited investors eyeing more surmountable minimums can alternatively consider actively-managed, publicly-traded mutual funds, which impose minimums as low as $50,000.
9. Multifamily Real Estate
In the face of high-interest rates and market volatility, multifamily real estate investments—which range from six-unit buildings to thousand-unit apartment buildings—offer accredited investors the potential for higher returns than public markets. Although segments of commercial real estate, like office real estate, have faced headwinds in 2023, the multifamily market continues to post strong and steady performance.
To invest in multifamily real estate, accredited investors can approach a real estate syndication or a REPE firm. These sponsors will pool capital from other investors to buy, develop, lease out, and sell multifamily properties for a profit. Here, minimum investment amounts vary widely depending on the sponsor. Syndicates may allow accredited investors to participate with as little as $5,000, while REPE firms may demand $50,000 or more. In any case, the multifamily asset class is lucrative—net IRRs between 8% and 12% are common.
10. Interval Funds
As of March 31, 2023, the interval fund industry held approximately $84 billion in total assets—$2.7 billion more than 2022’s $81.3 billion figure. Interval funds, which are closed-end funds that do not trade on an exchange, periodically allow shareholders to redeem a percentage of their shares at net asset value—hence its moniker.
Unlike traditional open-end funds, interval funds incorporate a diverse range of illiquid assets into a conventional equity and bond portfolio. Although illiquid investments are limited to 15% of an open-end mutual fund’s portfolio, interval funds are not subject to these restrictions.
That said, this flexibility comes at a price: Interval funds commonly come with minimums that range between $10,000 and $25,000.
11. Private REITs
Private Real Estate Investment Trusts (REITs) are typically available to accredited individual and institutional investors through private placements. Unlike their public counterparts, private REITs are not marked-to-market. This means they often feature lower volatility and unique tax advantages. For example, private REITs are structured as pass-through entities and thus pay no income tax at the corporate level. Instead, distributions are taxed as ordinary income.
Like many private investments, private REITs impose minimums of about $25,000. In exchange, they offer higher dividend yields. While public REITs sport yields ranging between 5% and 6%, private REITs notch average yields of 7% to 8%.
At The Spaventa Group, we pride ourselves on our stellar reputation for providing investment opportunities in some of the most innovative and disruptive companies in the world.
As a leading alternative asset management firm, we offer access to a diverse range of investment opportunities to accredited investors.
