The Direct Private Investments Show
Private Placement Risks
Timestamps:
Introduction to Direct Private Investment Risks [00:00:00 – 00:01:00]
Economic Condition Risks [00:01:00 – 00:02:19]
Illiquidity and Decision Risks [00:02:19 – 00:04:21]
Market Timing Risk [00:04:00 – 00:05:37]
Industry Related Risks [00:05:37 – 00:07:28]
Management Risks [00:07:30 – 00:09:24]
Offering Related Risks [00:09:25 – 00:10:30]
Handling Unforeseen Risks (12:36 – 15:58)
Introduction
On a recent episode of the Direct Private Investments Show, we dove into a
discussion with industry experts, Bruce Smith and Josh Greene, examining
some of the risks associated with private placements. From investment-
related risks to industry risks, management risks, and offering related risks,
we offer valuable insights to help you make informed
investment decisions. This article distills the key points we covered. For
additional color, we encourage you to read Risk vs. Return Considerations for
Alternative Investments here.
Investors should also ensure they understand the differences between private
and public securities, which can be found in Investing in Private Companies
vs. Publicly traded ones here. The following article focuses on some of the
more prominent risks associated with direct private investments and draws
upon the complementary video to be found at the end of the article.
Investment-Related Risks:
Josh Greene, VP of Sales and Analytics, emphasizes the importance of
understanding one’s risk tolerance and being aware of economic condition
risks, such as rising interest rates which can impact various investments like
real estate and equipment financing.
Bruce Smith, VP of Investor Development, highlights illiquidity as the most
predominant risk factor when considering investing privately. Investors must
be prepared for a “buy and hold” strategy, knowing that they cannot resell or
hypothecate the security during the investment period.
Industry Risks:
Josh shares insights on adverse conditions that can affect management
teams and investments. Examples include structuring transactions around
crop insurance policies in agriculture, should the crop suffer from a blight or
cold weather, for instance. He also notes the risks endemic to products which
require regulatory approvals in specific industries, such as pending FDA
approvals or marijuana legalization.
Management Risks:
Not all management teams are equally effective, according to Bruce. As
companies grow, the demands of a larger company may require a different
skillset with a different vision. In some cases, it may be necessary to replace
managers to mitigate such risks.
Offering-Related Risks:
Among a litany of offering-related risks, Bruce focused on missed projections.
A projection is just that – a management team’s best guess as to future sales
and expenses. But, as Josh notes elsewhere, no one can know all the risks,
and unknown risks can extend the sales cycle, or supply chains can break
down, or large customers can be wooed away. Projections and
forecasts may not always align with market realities. It’s essential that
investors understand that small changes in condition can affect the success
of a private placement.
Conclusion:
Investing in private placements comes with a unique set of risks. By
realizing that some (or all) these risks — investment-related, industry,
management, and offering-related risks – can occur, investors should assess
whether their risk profile matches private investments, and they should
decide how much they are willing to allocate to this portion of their portfolio
and to each investment.
As our experts, Bruce Smith and Josh Greene have shared, working with a
knowledgeable investment bank like Carofin should be able to help mitigate
potential pitfalls and lead to a successful investment experience.
Watch the full episode above and if investing in direct private investments suits you, we invite you to review our current offerings here.
