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Finding Opportunity in Private Placements

August 7, 2012

A hush sweeps over the ballroom of a four star Orlando Resort as a well-dressed CEO and CFO stride to the stage. They now have exactly 20 minutes to convince a sea of well-heeled investors and venture capitalists that their new business venture has a compelling market advantage, will enjoy meteoric growth, and one day, be acquired or “go-public”. They are seeking a five million dollar infusion for further product development and market expansion.

Meanwhile, across town, several leading bankers from competitive firms meet in secret at a private business club to discuss the chartering of a new community bank to serve an underrepresented business segment of the marketplace. It will take a minimum of $6 million to launch the bank, and over the course of raising capital, involve from 400-600 individual investors.

In 2006, there were 179 new banks chartered in the United States, led by 21 new financial institutions in both California and Florida. Over $1 billion was raised for these banks – all from the bank principals, board members and private individuals. In the same year, venture capital funds based in the US raised over $24 Billion – representing a mixture of pension plan dollars, combined with investments from high net worth individuals. Florida Venture, the sponsor of the annual ballroom event, has assisted in raising over $1.4 Billion for new companies headquartered in the Sunshine State.

What does each of these groups have in common? They each represent an opportunity for private investors to risk capital in order to potentially reap the rewards of significant growth – outside the traditional stock market choices. Just as importantly, these investments may be accessible to IRAs and Individual 401(k) plans through a self-directed administrator such as NuView IRA in Orlando.

While your stock broker may consider private investments a risk not worth taking, it may provide an important avenue to diversify your holdings and spread your risks across another class of investments. Here are just a few of the pros and cons of private placement investments:

Advantages:

  • Ability to meet/know the principals involved
  • Utilize your personal knowledge of an industry
  • Get in on the ground floor
  • Access large up-side potential
  • Help the company grow – through referrals, etc…
  • Participate in the excitement of funding a new venture

Disadvantages:

  • May be difficult to exit the investment quickly
  • May require investor qualification
  • True Market Value may be a challenge to determine
  • Company may have limited operating history to judge performance
  • Could be higher investment risk
  • May not be subject to certain government reporting requirements

The challenge of investing in private placements often can be locating the opportunity. If your interest is banking, most states will post a listing of denovo (newly chartered) banks on their state regulatory website, together with contact information. For other private ventures, you may turn to the myriad of venture capital clubs that meet routinely in cities across the country – one such listing is found on www.venturea.com. Simply by talking with financial professionals such as bankers, lawyers, CPAs, opportunities may also be uncovered right in your own community.

Regardless of the source, the responsibility is on the investor to properly vet the company, do the research and make a calculated decision on risk vs. reward. Self-directing your IRA or tax deferred funds may also prove to be the best source of capital for you, especially if the investment may be illiquid for several years – and the funds are not needed short term.


Glen Mather is President of NuView IRA, Inc., a leading self-directed IRA administrator in Orlando. He can be contacted at 407-367-3472 or [email protected]