Private Investments Might Get More Exclusive!

The SEC is considering tweaking the definition of an “accredited investor.” Why is this significant?

​​Since eligibility for most private investments, including private equity and venture capital offerings, revolves around qualification by a prospective investor as an accredited investor, any tweak to the definition could constrict or expand the pool of potential investors.

For individuals, an accredited investor is a person who meets one of the following criteria:

  • Has at least $200,000 in personal income ($300,000 combined with their spouse) over the past two years, with the expectation of the same or higher income in the current year; or

  • Has a net worth of more than $1 million jointly or with their spouse, excluding the value of their home.

The SEC’s recently published regulatory agenda includes a planned proposal to redefine “accredited investor” status at its April meeting. The tweak can go either way. The SEC can expand the definition to be more inclusive. It could go the other way and narrow the definition to boost investor protection – thereby restricting the pool of potential investors.

The potential tweak to the accredited investor definition is another reason qualified investors can get off the fence when considering investing in private alternatives.

I’ve been trumpeting the merits of private alternatives like private equity and venture capital for years. With the right partners, not only can you achieve above-market returns but do so with less volatility and risk due to noncorrelation with Wall Street. Now, in the midst of some of the highest inflation in decades, there’s more reason to consider private alternatives.

With the Fed announcing its raising of interest rates on Wednesday, a traditional portfolio consisting of stocks or a combination of stocks and bonds is bound to experience pain in the foreseeable future.

​​Higher interest rates mean higher costs of borrowing for both businesses and consumers. The result is the intended slow down of economic activity to rein in rising prices. Hits to corporate bottom lines will undoubtedly slice stock prices and traditional portfolios – including 401(k)’s.

Private alternatives – especially cash-flowing assets and businesses – offer investors the best hedge right now against inflation and diminished stock returns from rising interest rates. Income and underlying values that correlate with inflation are ideal hedges against diminished buying power.

If the SEC does follow through on redefining the meaning of accredited investors and leans toward narrowing the definition – thereby restricting access – then investors should take full advantage of the opportunities available to them now instead of waiting for the other shoe drop and having doors close.