The coronavirus pandemic has unleashed a wave of volatility across the markets…
From its all-time high of 3,386 on February 19, the S&P 500 bottomed at 2,237 on March 23. That crash sent us into bear market territory.
Since then, the markets have rallied 27%, recouping more than half of its losses. In the interim, we’ve seen intraday moves of 5% to the upside and downside.
Personally, I’ve lost count of how many times these wild swings have triggered the market’s circuit breaker.
We understand it’s difficult being an investor in this kind of environment. The volatility can be stomach-churning.
One way to smooth the ride is asset diversification.
And in today’s essay, I’ll reveal a “hidden” market that offers the promise of life-changing gains without all the volatility we’re seeing in the stock market.
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The $5 Trillion Hidden Market
I’m talking about private markets.
Here’s what Teeka Tiwari said about them…
During my time on Wall Street, I discovered a secret… There are really two markets: The “hidden” market, where the rich and connected make their millions… and the stock market for everyone else. The hidden market is private equity. And it’s the playground of venture capitalists.
According to McKinsey & Company, this market has over $5 trillion in assets under management. For years, Wall Street has walled it off from you. And for good reason: The gains it’s pocketing are truly massive – far bigger than what you get with regular stocks.
For example, over the last 20 years, the U.S. Venture Capital – Early Stage Index has returned an average of more than 86% per year.
Yet most of the well-known stock indexes – like the S&P 500, Nasdaq, and Russell 2000 – have returned an average of less than 7% per year.
That’s not a typo. Early-stage, private companies have returned over 12x what public companies have during the past two decades.
And now, new rules from the Securities and Exchange Commission allow ordinary investors to get in the game and invest in private companies before they go public…
They’re called Regulation CF and Regulation A+ offerings. The main difference between the two is the amount of money each can raise.
Under the current rules, Regulation CF offerings can raise up to $1 million from the public. Regulation A+ offerings can raise up to $50 million.
You can often invest in a Reg CF offering with as little as $100. And minimums for Reg A+ deals generally range from $250–1,000.
In the best of times, private markets outperform public markets. But they do even better during volatile times…
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Private Companies Can Withstand Volatility
I reached out to Teeka’s chief private equity analyst, William Mikula. And he told me now’s the perfect time to get into these private markets.
Here’s William…
In the public markets, many companies are on the brink of bankruptcy and desperate for assistance. For example, movie theater giant AMC is in talks about hiring bankruptcy experts. It’s rough out there for many companies. The thing is… the market crash didn’t affect the hidden market.
You see, a company raising funds through a Regulation A+ offering is private. And since these companies don’t trade on public exchanges, their prices aren’t affected by market volatility.
By operating as private entities, they’re able to methodically execute on their business plans, outside of the wild swings of the public markets.
William says private companies have four other key advantages over public companies:
- Unlike public companies, market swings don’t affect share prices of private companies. In fact, the prices of the private companies in our Palm Beach Venture portfolio have remained stable since the coronavirus outbreak.
- The best private companies built up substantial war chests before the pandemic. And they can use that money to buy distressed assets on the cheap.
- If the market remains volatile, they can remain private until the conditions are more favorable for a public offering. So private companies have tremendous flexibility.
- Studies by research firms like Blackstone and KKR show that private companies not only outperform the S&P 500… they also have lower volatility than publicly traded companies. And they perform better during challenging times.
With all the volatility we’re seeing in the public markets, now’s the time to gain some exposure to private companies.
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Time to Buy Sweetheart Deals
Remember, since these “sweetheart deals” are private, they don’t trade on a public exchange. So even when wild market volatility hits, their share prices stay the same.
Now, you can’t buy private startups from your brokerage account. And your investment adviser will probably never tell you about them.
So if you want to explore private equity investing, consider crowdfunding platforms like SeedInvest and MicroVentures. They list dozens of startup companies raising money from the general public. In some cases, you can get started with as little as $100.
But always do your due diligence and never bet more than you can afford to lose.
By Chaka Ferguson, managing editor, Palm Beach Daily