The world of private capital markets investing (including private equity, venture capital, private debt and hedge funds) can seem scary and difficult to understand for those just starting out.
It doesn’t have to be this way, however. A bit of knowledge coupled with patience, common sense and a willingness to learn can quickly take much of the mystery out of it.
Here are five common beginner mistakes investors make – and what you can do to avoid them.
Just as with investing in the public capital markets, sizing of investments is extremely important. Indeed, perhaps more important, given the private markets are generally less regulated and have fewer fail-safes to ensure users are protected. As with virtually any form of investment, it is a cardinal mistake to put all your eggs in one basket. By diversifying your investments, you can limit your losses and reduce the fluctuations of investment returns without sacrificing too much potential gain.
The best asset allocation at any given point in your life will depend largely on your time horizon, interests and your ability to tolerate risk.
2.Not Understanding Risk Vs. Reward Of A Potential Investment
All opportunities in the private capital markets are not created equal. Making sure you understand both the rewards and risks of any investment you are considering is still of crucial importance.
Let us take private funds as just one example. Many new investors may not fully appreciate the risk-return trade-offs between, say, a private real estate fund with a broad existing portfolio of properties in a safe and stable sector of the market vs. a brand new VC fund with high start-up risk. Doing your homework to understand the risks and rewards of any given investment will take you far.
3.Not DYOR (Doing Your Own Research)
Research is and should be a huge part of any good investor’s decision-making process.
Is the management behind the investment capable and experienced? Does it have the support of a good board and shareholders? How does the company’s performance stack up against those of its competitors? Do you fully understand its business strategy? Is the company especially vulnerable to certain kinds of risk – be it legal, regulatory or business-related? Is the company able to leverage on any particular strengths?
Before any potential investment, you must put time and energy into fully understanding the company, team, and details behind it.
4.Not Paying Attention To Past Performance
Although past performance is no guarantee of future results, it is still important. Before you make your decision, you must ask yourself if you are just investing in the vision presented to you or if it’s backed by sound historical performances or valuations. Having a strong performance record is a good sign that an investment you are considering is a good one. Investments with less-than-stellar records – or lack of any records at all – should be approached with more caution.
5.Patience Is Essential
Private capital market investments on more traditional platforms often have lengthy lock-up periods — commonly between 5 to 12 years and sometimes even much longer – before the possibility of an exit. Those working with those platforms should be prepared to have their funds tied up for some time. Patience is key.
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