One of the best strategies to grow an IRA is to invest in private equity with unlimited growth potential and reinvest your earnings into new assets for unlimited growth.
The best part of this strategy is that the money you reinvest within your portfolio is not capped so that you can grow your IRA exponentially. However, you’ll need a self-directed IRA with a trusted custodian to invest in private equity
This guide will discuss the fundamentals and how to invest in private equity with a self-directed IRA.
What Is Private Equity Investment?
Private equity is an alternative investment asset that has become increasingly popular among financially savvy investors. This type of investing allows accredited individuals or organizations to buy shares of private entities – or those not listed on the public exchange. It also gives businesses at various levels – start-ups and mature businesses alike – access to necessary capital.
Once an individual or entity invests in a private company, their investment grows alongside the business, hoping that they’ll make a profit once the company goes public.
Though there may be an increased risk associated with these investments, they can also yield higher returns and allow investors to diversify their portfolios and use the funds to bolster their income in retirement or invest in other opportunities down the road. As such, private equity investment is often a popular choice among self-directed IRA holders looking to take a more aggressive step towards wealth accumulation.
3 Types of Private Equity Investment
The term “private equity investment” doesn’t refer to a single type of investment. Instead, this type of investment typically falls into one of three categories:
1. Venture Capital
Venture capital investments fund businesses in the earliest stages of development.
At the earliest stage of business, VC funds may be used to help businesses with research and development. Funds can also provide a capital influx during the start-up stage or help a newer business with expansion efforts.
Investors may also use venture capital investments to purchase existing shares to buy out other investors, an activity that’s often referred to as replacement capital.
As early investors, venture capitalists often take on more risk but may enjoy significantly higher returns if the company succeeds.
2. Growth Equity
Growth equity investments are investments in an established or mature business. Growth equity funding provides mature businesses with an influx of cash often used to support expansion initiatives.
Companies typically seek this type of investment as they pursue new markets, acquire other organizations, or simply stabilize or grow profits.
Similarly, growth equity investments also yield high earnings potential and come with less risk.
Private equity can also be used to invest in underperforming companies but have the potential to become profitable in the future.
While riskier, these investments also have massive earnings potential.
Depending on the circumstances, buyout equity can be used as acquisition capital or as part of a leveraged or management buyout.
What are the Benefits of Private Equity Investment?
This investing is an increasingly popular strategy among individual investors (also known as “retail investors”) and private equity firms. One of the primary reasons it’s such an attractive option for investors is the potential for returns that can far outweigh those earned by traditional investment practices, like stocks, mutual funds, and compound interest investments.
Another benefit is lower volatility. Even though there is inherently more risk involved in a private equity investment, once made, success isn’t tied to the stock market.
Finally, private equity investment provides a tax-free and unique opportunity to invest funds in an industry or organization you support. As a side note, this opportunity isn’t available on the public exchange or through traditional retirement investment accounts and requires an SDIRA.
How To Invest in Private Equity
Like other alternative assets made available to self-directed IRA holders, private equity investments require due diligence and investment knowledge. If you’re ready to take the plunge into private equity, you need to take a few steps before making your first investment.
1. Become an accredited investor. According to the U.S. Securities and Exchange Commision (SEC) an accredited investor must meet at least one of the following criteria:
- Earn an income of $200,000 or more ($300,000 or more if investing with a spouse) for two years prior to investing.
- Have a net worth of $1 million or more (either alone or with a spouse/equivalent of a spouse)
- Have a Series 7, 65, or 82 licenses in good standing
2. Choose a qualified financial custodian. These investments cannot be funded by traditional retirement accounts that limit investment opportunities to assets like stocks or mutual funds. For that reason, you’ll need to find a qualified self-directed IRA custodian that allows you to invest in private equity.
3. Research investments. Once you set up your self-directed IRA with a qualified financial custodian, you can begin to research private equity investment opportunities.
Carry out your due diligence to make an educated decision about your investment strategy. There are multiple resources available to help individual investors, including Bloomberg, Zephyr, Capital IQ, and PitchBook.
4. Track your progress. Unlike other types of investments, private equity doesn’t offer quick liquidity. It will take several years to access profits, depending on the industry and investment, before you can access profits. You can gauge performance by following industry-specific trends and using our industry account-leading portal to assess performance.
Self-directed IRA private equity investment opportunities can help you diversify your portfolio with the potential of high rewards. And, since performance is not tied directly to the success (or volatility) of the public exchange, these investments can also provide stability.
If you’re considering private equity investments and want to leverage your IRA funds to do so, contact Horizon Trust today. We can help you set up a self-directed IRA and provides you with the means and resources to make educated and secure investments.