Not-So-Privately Public Investing

By: Michael Foster, CFA, CFP®

‍

I came across an article in the Wall Street Journal last week on a new investment targeted toward individual investors. Forge Global and EquityZen, which allow outside investors to buy in to certain private companies, are reportedly lowering investment minimums to as low as $5,000. They’re also partnering with Yahoo Finance to share more price info on the listed companies using a proprietary model. I’m generally all for greater access to investments and transparency. What worries me in this case is that this access seems to come with high explicit and implicit costs, and that the added transparency isn’t all that transparent.

‍

The move of private markets targeting individual investors isn’t a new one. Once reserved mainly for the ultra-high net worth and institutional investors, access to private markets is increasingly being offered to retail investors in a variety of different ways. We have been getting more and more solicitations by way of phone calls, emails, and random offers (one company sent me a singular cookie with their logo on it in the mail) from fund companies selling their latest and greatest private equity, credit, and real estate offerings. We’re always open to learning more about what’s out there that could benefit our clients, but we’ve held off on using these investments to this point. Why? They tend to be illiquid or have redemption limits and are often insanely expensive. That may not matter to a pension fund or endowment with an unlimited time horizon, millions of dollars allocated across several different asset types, and more direct access to different types of investments. 

‍

Forge Global and EquityZen’s move to allow investors to directly participate in private companies feels similar to what we’re being offered, but potentially without the added layer of an established fund company vetting the offerings in advance. The fees for access are also high at 2-5% commissions. I also worry that a limited amount of publicly available shares paired with potentially high demand will lead to prices that don’t reflect the true value of the company, likely in the wrong direction for the buyer. This feels like another example of a few investment companies chasing consumer demand, speculation, and a fad. To be very clear, I don’t think that there’s anything broadly wrong with private investing or that retail investors should never own it. I just don’t know if the juice is worth the squeeze right now based on what I’ve seen.

‍

This all stands in stark contrast to our investment approach in public markets. If you’ve read any of these posts in the past, please forgive me for sounding like a broken record by reiterating our belief in low-cost, broadly diversified, transparent investments. We help our clients reach their financial goals by investing in highly liquid markets around the world. We do our best to keep a long-term view, avoid the big mistakes, and focus on what we can control. It may not be sexy, but it tends to work.