Investors have long known diversification is key to managing risk and protecting returns in the individual portfolio. Many investors rightly maintain significant portions of their portfolios in mutual funds or ETFs to gain exposure to a larger number of companies and asset classes. Fixed income, emerging markets, commodities – with a common brokerage account individual investors can gain access to most investment asset classes.
However, one area that has traditionally been out of reach for the typical independent investor is smaller private companies, both with larger firms (private equity) and early stage companies (venture capital). Yet, this is an asset class worth attention. Historically, these investments have outperformed public equities. As of late 2011, Cambridge Associates data show strong outperformance for the US Private Equity Index over public equities in 1-year, 3-yr, 5-yr and 10-yr periods. In consumer and retail, the data show average gross company returns above 18% IRR in both Private Equity and Venture Capital investments for companies receiving investments in the last three years.
For consumer and retail in particular, the data also shows remarkable stability in the returns. There has not been a single negative year of returns for private equity investing in consumer / retail going back to at least 1997, according to data from Cambridge Associates. As you can see in the chart below, even through the dot com meltdown and the Great Recession, consumer and retail delivered positive returns for investors.
Private Market Diversification – for Individuals
So, how can individual investors gain exposure to this asset class as part of a well-diversified portfolio? If you happen to have $1 million to spare, you are likely to be able to get into a fund of funds or a well-managed firm making direct private equity investments.
However, if you follow a rule of thumb to keep less than 5% of your investable assets in this illiquid, direct investments category, the $1 million threshold excludes a great majority of the accredited investors in the market. Moreover, diversification within this asset class is especially important, as these investments are higher risk than public market investments. Making select Angel investments can become difficult given the traditional minimum investment.
Building a Solution
I launched CircleUp in 2012 to solve the problem of access to private market diversification for individual investors. Here’s how: we’ve built an online marketplace that connects accredited investors with high-growth consumer and retail companies, and allows the investors to invest in and receive equity in those companies. By lowering the cost to make these investments – plus networking time and minimum investment – we are expanding participation in the market. (NB: being an accredited investor is still a hefty threshold; it means you have over $200,000 in annual income for the last two years or you have net worth of at least one million dollars excluding your home).
On CircleUp, accredited investors can build a portfolio of early stage private companies with an initial investment as low as $1,000. Those looking to gain exposure to private market investments can build a well-diversified portfolio of companies within the asset class, all for less than the typical minimum investment amount for an Angel investment today. What’s more, there are no fees for investors.
On CircleUp, accredited investors can invest directly in companies like Nomad, a company innovating new hardware technology, and Raaka Chocolate, a maker of organic bean-to-bar chocolate. Investors can also diversify into the markets through fund products like our B-Corp Circle, a fund dedicated to investing in mission-driven companies. So far, investors have invested more than $70M into companies listed on the platform.
We’re thrilled to partner with Personal Capital so that CircleUp users can now track their CircleUp investments using Personal Capital software. By seeing your investment in the context of your entire net worth, you can make more strategic investing decisions.
Technology is changing the world for everyone. Online marketplaces have helped to eliminate inefficiency in a variety of activities– from making restaurant reservations (OpenTable) to making small purchases (eBay, Etsy), and even dating (Match, OKCupid).
CircleUp is bringing efficiencies to the private investing; Personal Capital is doing the same for wealth management. And as we’ve seen technological change in other industries swiftly bring benefits to consumers, so too will the changes we’re making bring benefits to investors.