Risk vs. Return Considerations

  • Evaluating the risk of a potential investment is arguably the most important aspect of any investing activity, whether as part of a private securities offering or for a publically registered investment.  No investment is without risk, and losses will inevitably happen within a portfolio.  Limiting losses and achieving the projected returns of performing investments is therefore critically important.

 

  • Private investment offers the opportunity for substantially higher returns than comparable publically registered securities, but investors must be committed to a deal by deal analysis process that thoroughly evaluates each opportunity both for its individual merits as well as its consistency with the investors overall investment goals and risk tolerance.

 

  • Private investments, because of they have virtually no ability for secondary sales, are priced at a premium to comparable publically registered securities.  This offers the opportunity for incremental yield to private investors, but it severely limits the investor’s ability to actively manage their investment portfolio.

 

  • The key to consistently successful private investing is for the investor to build a diversified portfolio (no more than 10% exposure to a single transaction) where each investment has been subjected to comprehensive due diligence, which includes an independent testing of all of the basic issuer disclosures and the underlying elements of the business model driving the success of the company being financed.

 

  • As a general rule, an individual investors aggregate private investment should constitute a minority (say 5% to 30%) of their overall portfolio, with publically registered investments and money market funds comprising the balance.

 

  • Private investments should be made with an individual investor’s discretionary funds.  That is, cash resources which the investor can lose without impacting their important personal obligations such as mortgages, college tuition, retirement, etc.

 

  • There are two general categories of risk accompanying any investment…fundamental risk and market risk.  Fundamental risks are those relating to the business being financed, such as the cost of production, customer demand for its products, personnel performance, etc.  Market risk pertains to the ongoing volatility of the public financial markets and its impact on the potential liquidity or relative attractiveness of a private security.