With all the different ways to invest in the market, you can narrow them into one of two categories, public or private. An example of public investing would be stocks, exchange traded funds, and mutual funds. These are accessible to nearly everyone and are relatively easy to enter and exit. The underlying information such as financials and management are mandated by a governing body and are publicly available. Private investing, on the other hand, typically has an investment requirement that limits investors and will have principal terms indicated in a Private Placement Memorandum.
Breaking this down further, let us start with the accessibility. As previously stated, public securities are typically easy to enter and are usually free of initial investment requirements. Where you may see requirements are in the mutual fund space, but even though they are in place, the limits are usually accessible to retail investors. With private investments, these often require 5 to 8 figure initial investments and require the investor to have their money allocated for long periods of time.
Length of time invested can differ as well between public and private investments. For example, should you purchase a stock or ETF, you can enter and exit the position as you wish. Mutual funds may have a restriction on how often you can enter and exit, as these vehicles are not meant for trading. Private investing on the other hand tends to hold your investment for several years. The reason for this is your investment is likely to be used in funding asset purchases, which usually yield a profit only after a certain amount of time has passed.
Lastly, fees and return structures will vary significantly between private and public investment funds. While fee structures can tend to be lower with specific publicly accessible investment funds, the returns are determined by share price. In order for private investments to remain competitive, they too will offer low fees, but the return structure will be different. At Honeyguide, we offer a distribution waterfall. What this means is that investors receive profits first, with a preferred return, paying back the original capital invested. Only after this happens do we partake in any of the proceeds. This is one way of ensuring that incentives are aligned with the management team and investors money. The management team must make good investments in order to get paid.
With private investing, it may require a higher initial capital, but the risk and return can make it worthwhile. This can add diversification to your portfolio and add another layer of generated returns