Private Equity Investing Using a Self-Directed IRA
Do you know someone who is starting a company and is seeking investors? Is there an established privately held company you’d like to invest in to help it expand—and earn some equity in the process?
If you have a self-directed IRA, you could include private equity investing for startups and other private companies within your retirement plan. The investment gives you shares that represent ownership or an interest in the entity. Private equity investments are among the many alternative assets in which you can use to build a more diverse retirement portfolio through self-direction.
What is a private equity investment?
Whether via accredited online crowdfunding platforms or direct investment, private equity is a capital investment in an entity that is not publicly traded; rather, it’s an investment in a privately held company. Once only utilized by high-net-worth investors, both accredited and non-accredited investors may now take advantage of this investment opportunity. Including private equity investments in one’s retirement portfolio also provides a hedge against the volatile stock market.
Examples of private equity investments are:
- Private common stock, preferred stock; options, rights, and warrants – shares in a private company, primarily held by its founders, venture capitalists, and private equity firms
- Private hedge funds – investors pool their assets with others to take advantage of investment strategies laid out by the fund manager
- Limited liability corporations (LLCs), limited partnerships (LPs)
- Foreign private equity – investment in privately held in non-U.S. companies
- Convertible notes – relatively short-term loans repaid through conversion to an equity stake in the company
When using a self-directed IRA, the plan invests directly into the business, partnership, or other entity, with terms worked out between the parties (in the case of a private placement, this is typically done via a subscription agreement). The entity gets needed capital and the self-directed investor diversifies his/her retirement portfolio by including this nontraditional investment within the retirement plan.
Ask your financial advisor if a private equity investment is right for you
As with any self-directed investment, account holders should conduct full due diligence about an investment opportunity before sending instructions to the self-directed IRA administrator. At Next Generation, we also strongly recommend that you check with your trusted advisor as to whether private equity and the potential tax liabilities associated with the investment fit with your financial goals. After all, every asset class has its risks – be sure you fully understand the upsides and potential downsides of any self-directed investment before making your decision.
For individuals who would like to invest in private equity, Next Generation offers complimentary educational sessions, so you can learn more about how these investments are structured with a self-directed IRA. Alternatively, you can contact our team with any questions about this or other self-directed investments by phone: 1-888-857-8058 or email: NewAccounts@NextGenerationTrust.com.
A Look at Emerging Industries for Self-Directed Investments
Tech-related and social factors are making the emerging data security, blockchain and electric vehicle industries attractive to self-directed investors.
Back in February—during a tumultuous couple of weeks on the stock market—the Dow Jones’ sharp decline got investors’ attention, though not necessarily in a good way… or was it?
Stocks were being dumped as people panicked… but this may simply indicate the investing environment is ripe for a new look at what’s hot and what’s not. Factors that may affect investors’ choices could be tech-related, and social factors are influencing certain markets today. It’s also putting emerging industries and startup companies on the watch list for investors with self-directed retirement plans who are looking for alternative assets to include in their plans.
Let’s take a look at four industries that are catching attention in a good way:
It seems every week we hear a report about a major data breach at a nationwide or global company. The SEC published new guidelines for public companies to disclose privacy breaches and consumers are waking up to data privacy concerns and the risk of cyber theft, which is fueling growth in the cybersecurity sector. There are large corporations dedicated to this, as well as startups seeking funding. Digital forensics and data security technologies are hot!
It’s the basis for cryptocurrency (like Bitcoin) and the investment world’s been gaga about it. This is partially because blockchain is finding other applications outside of the financial world such as data storage in the cloud, digital ID protection, and securing sensitive documents (blockchain technology allows digital information to be distributed but not copied). Blockchain energy consumption also affects renewable energy requirements, which could spur a tangential investment market.
Electric cars and trucks
There’s a lot that goes along with electric vehicles—the batteries and battery technology/innovation, charging stations, and the growing internet of things and smart technology. Investors who want to get in on this transportation sector have an open road ahead.
These industries, and others that reflect the social and technological issues of our day, need capital to grow into their potential. Savvy investors who self-direct their retirement plans can think way outside the box (or portfolio) to include private placements in these and other social-techno emerging companies as part of their plans.