Thursday, 22 December 2016

An Amateur Investors Guide to Private Equity and Hard Assets

I am a cautious investor; not at all interested in the risks involved with stocks and bonds. I like to invest in the alternatives; investments that have little or no correlation to the bond and stock market.

Although there is an ever-increasing number of alternative opportunities to invest in, two of my favorite alternative investments are private equity and hard assets.

Private Equity

Private equity is money made available to private companies or investment firms.

Using private equity, investors and managed investment funds make investments directly into private companies. In some instances they conduct buyouts of public companies and make them private.

If invested directly into the company, the funds raised through private equity investment are often used to develop new products/technologies, expand working capital, make corporate acquisitions, or strengthen the company's balance sheet.

In most instances, private equity firms will work with the partner companies, typically over several years, to “turn them around” with the intention of selling them for a profit.

Private equity deals fall under a Securities and Exchange regulation that requires investors be "accredited" or "qualified." For an individual to be accredited under the SEC rules, he or she must have income of more than US$200,000 per year for the past two years (US$300,000 for a married couple) - and have a reasonable expectation of making the same or more in the current year - or have a net worth, excluding primary residence, of more than US$1 million.

Hard Assets

I was once told that "hard assets are at the center of a wise investor's portfolio". Heal assets have fundamental, intrinsic value. In the event of currency devaluation or inflation hard assets can hedge against any losses.

The hard asset I find the most interesting is cargo containers. Making an investment in shipping containers could be regarded as the ultimate hard asset.

In the last several years, Warren Buffett has purchased the Burlington Northern and Santa Fe Railroad. Why buy a railroad? A railroad, like shipping containers, is nothing but hard assets that make money by moving other hard assets; such as coal, wheat, corn, steel, etc. So, Warren Buffett is investing paper money into hard assets, so that if the dollar drops to zero it has no effect on him; he still owns a railroad.

Final Thought

If your portfolio is primarily composed of so-called paper assets, like stocks, bonds and most financial instruments, then your financial security hinges on the value of your country's currency. If the currency devalues, so does your portfolio.

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