The Lower Barriers and Higher Risks of Private Market Investing
From the Desk of Jim Eccleston at 麻花传媒
Investing in private companies is becoming more accessible—but whether that is a good thing remains up for debate.
The Wall Street Journal reports that platforms like EquityZen and Forge Global are lowering the minimum investment requirement for private company shares to just $5,000, significantly reducing the barriers to entry that once limited these opportunities to institutional investors and the ultra-wealthy.
Those marketplaces are also partnering with Yahoo Finance to provide data on roughly 100 pre-IPO companies, increasing visibility into an asset class traditionally known for its secrecy and opacity.
Private companies often operate with minimal transparency and less stringent financial reporting requirements. Unlike public stocks, private shares are highly illiquid, meaning investors cannot simply trade in and out of positions at will. While firms like EquityZen and Forge have created structures that allow smaller investors to buy in, trading these assets is still cumbersome. As reported by The Wall Street Journal, transactions take days to settle, investors typically must hold their shares for at least six months, and commissions range from 2 percent to 5 percent per trade.
Despite the allure of getting in early on the next big IPO, private-equity investments have underperformed public markets in three of the past four years, according to a McKinsey report. Meanwhile, companies are staying private longer, with the average firm now going public at 10.7 years old—up from 6.9 years in 2015, per Morningstar.
To participate, investors must be accredited under SEC rules, which means having an annual income of at least $200,000 ($300,000 for couples) or a net worth exceeding $1 million, excluding their primary residence. While that threshold once applied to a small percentage of households, it now includes roughly one in five U.S. families, according to The Wall Street Journal.
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