Lockups and larger returns
In exchange for higher expected returns on that private investment, investors agree to leave their money in a fund for a number of years, typically five to 15, but sometimes longer. During that period, known as the lockup, investors do not have access to their money.
Depending on the type of private investment, they may be asked for money at certain points, known as a capital call; receive interest payments; or find out that their investment in a great new start-up has evaporated. You have to put your faith in the partners running the fund, who purport to have expertise that will help increase the value of the investment.
There are many flavors of private investments. Venture capital aims to invest in a company at an early stage and benefit from exponential growth over time. Private equity can be used to take control of an existing company with a strategy to increase its growth. Private credit can be used to make high-yield (and high-risk) loans or buy the debt of an existing company.
These private investments have been popular with endowments; David F. Swensen, chief investment officer of Yale University’s endowment, is often credited with popularizing this approach. But one downside even for affluent investors is that most investments have relatively high minimums, from $250,000 on up.
Some companies, like iCapital Network, are pushing to allow high-net-worth individuals to invest smaller amounts by pooling many investments together while also giving them a platform to sell their stakes early, if need be.
“A lot of people struggle mentally with the longer lockup nature of these products,” said Lawrence Calcano, chief executive of iCapital Network, which manages $46 billion for 70,000 investors in 460 different funds focused on private strategies.
He said iCapital was seeing increased interest in investing in private credit, particularly with direct lending to mid-market firms.