Whenever the equity and bond markets are volatile, many investors seek alternative investment strategies, either for higher yield or for specialty equity investments that don’t fluctuate like stocks do. This can spur growth in the private placement sector, in which investors can redeploy trillions of dollars from stocks and bonds. The types of investments available are varied in terms and risks, and most can be purchased by an individual retirement account.
What is a Private Placement?
A private placement is a security that is exempt for registration under Securities and Exchange Commission Regulation D, which sets the rules for such exemptions. These include the size of the offering, the net worth of investors and the guidelines on how the particular investment can be marketed. Suitability rules still apply to anyone investing, as well as disclosure of the investment details, but the security does not register and report to the SEC like a publicly-traded company. There are three levels of private placement. Rule 504 deals with offerings of $1 million, Rule 505 is for $5 million or less and Rule 506 has an unlimited offering limit.
Who Can Invest?
All three levels of private placement are available to accredited investors who must have either a net worth of $1 million, or income in the most recent two years in excess of $200,000. For Rule 505 and 506 offerings, there can be up to 35 non-accredited investors, but they must have sufficient investing experience and knowledge to make an informed decision about the investment involved. For suitability purposes, private placements are usually highly illiquid without a secondary market to sell if you need the money. There is no hard and fast regulatory rule about what percentage of a person’s assets can be in private placements. Most investment firms that offer private placements impose limits on what they will allow in client accounts.
Are They IRA Approved?
Internal Revenue Service rules do not specifically approve or disapprove any investments in IRAs. There are only two types of investments that are not allowed in IRAs: life insurance and collectibles. The list of collectibles is also pretty short, and includes precious metals, artwork, stamps, antiques, rugs, precious gems, alcoholic beverages and other “tangible personal property.” There is an exception for approved types of precious metals. Private placements, however, are not approved by all custodians of your IRA, so you may have to make different arrangements if you have a standard brokerage IRA, and certainly if your only IRA is at the bank.
Will Your Custodian Approve?
Most IRA custodians will not allow private placements, or other alternative investments. The major brokerage firms and banks want you to hold their mutual funds, stocks or bonds. The two largest independent clearing firms, Fidelity’s National Financial Services and Bank of New York’s Pershing, are a little more flexible and will allow custody of some private placements. Most require the services of a specialty trust company or custodian. Entrust and Sterling Trust are the two largest, but more firms are getting involved as the private placement sectors grows. Be prepared to pay up, though, as custodial fees range from a low of $50 to several hundred, sometimes depending on the value and number of private placements involved. Many private placement sponsors have arrangements for IRAs with a preferred provider, which can save a considerable amount of money.
What Kind of Investments Are Available?
There is a high concentration of real estate in the private placement market, but in that sector, there is also plenty of diversity. You can invest in apartment complexes, office buildings, hotels, marinas, shopping centers and even foreclosure properties. You can have multi-tenant properties, or an increasingly popular single-tenant, triple net lease property. Triple net means the tenant is responsible for all the expenses and upkeep and pays rent to the “owners,” also known either as investors or partners. All of these investments are typically open-ended and non-transferable. That means you can’t sell it until the property manager is sold. Realistically, however, the sponsor is also the property manager, and they will schedule a liquidity sale within five years in order to organize another deal. There are also gas and oil royalty partnerships, equipment leasing programs and other private equity type businesses that are often organized as private placements.