When I started my investment career, I can honestly say that I was a bit naive about how the market worked.
After studying all of the academic research in school, I believed that the stock market treated investors fairly and that everyone had access to the same opportunities.
Boy, was I wrong!
I quickly found out that big financial institutions (including the hedge fund I worked for at the time) had the upper hand with opportunities like investing in IPOs and special-purpose acquisition companies (or SPACs).
These investments we could make as a hedge fund were completely unavailable to most individuals like you and me.
It didn’t take long for me to see how lucrative these deals could be for our firm. And it also didn’t take long for me to feel jaded about how the whole system worked.
Thankfully, there are some specific ways that individual investors can fight back and claim part of these profits for themselves.
It’s a loophole that I call the “backdoor SPAC.”
And today, I’ll show you how you can use this loophole to profit from deals you’re not supposed to have access to!
The Private Equity Advantage
One of the things that I love about our public stock market here in the U.S. is that it’s designed to give everyone a fair playing field.
If you buy shares of Apple, Microsoft or Tesla in your brokerage account, you’ll get the same price that any institutional investor would receive.
The trading rules on the New York Stock Exchange and NASDAQ marketplace protect individual investors and help make things much fairer.
But what about investment opportunities that aren’t listed on these markets?
That’s where institutional and high net worth investors have the upper hand.
In most cases, if you want to invest in a company that doesn’t trade on the public stock market, you have to be an accredited investor. This means you have to have a lucrative income, a high net worth (or both) just to have permission to invest.
But just being an accredited investor won’t necessarily give you access to the most lucrative deals.
That’s because many private companies are very selective about who they allow to invest. So unless you know the right person, have the right skill, or can offer something special to the company you want to invest in, you’re out of luck!
I saw this first hand at the hedge fund.
Every few weeks, a company would drop by our office with a presentation about what they did and how we could invest.
As a hedge fund, we often had the opportunity to buy shares years before the stock ever made it to one of the major stock exchanges.
That’s not fair.
And it certainly puts individual investors like you and me at a disadvantage to well-connected institutions like hedge funds, pensions, endowments and the like.
So what can we do to even the playing field?
I’m glad you asked!
If You Can’t Beat ‘Em, Join ‘Em!
One of the best ways to tap into the advantage that institutional investors have is to invest in the institutions that profit from them.
Private equity companies are financial firms that run private funds only available to select customers. And these firms have access to the best private deals.
Ironically, even though you may not be able to invest in the funds directly, you can buy stock in the companies that can — which is even better for you!
That’s because private equity companies have three ways to make reliable profits.
First, they charge a management fee for the money that is invested in their funds. Often this is as high as 2% of the capital each year. So if a private equity company has a $1 billion fund, they’re already collecting $20 million in fees from the beginning!
Second, these companies charge an incentive allocation. In other words, they get to keep a percentage of any profits their customers make. This gives the private equity firms incentive to find the best investments for their customers.
Finally, private equity companies invest in their own deals so they make money alongside their customers. So if a private equity fund takes a position in a private deal, the private equity company can also invest its own money in the deal. Then when the deal turns a profit, our private equity company locks in its own portion of the gains — alongside the customers in the fund.
All told, these lucrative investment companies enjoy a very successful business model. And in today’s market with big IPOs and SPACs giving private equity companies huge profits, it’s a perfect time for you to invest!
One of my favorite private equity companies is The Blackstone Group (BX). You’ve probably heard me talk about them before. This company is led by legendary investor Stephen Schwarzman, one of my favorite investors of all time.
Just this week, Blackstone reported that the company is selling one of its private investments through a SPAC deal.
This type of transaction has become very popular this year, allowing private equity companies like BX to sell a portion of their holdings to the public market, locking in huge profits in the process.
If you invest in shares of BX today, you’ll ultimately be profiting from these deals too! Because as an investor, Blackstone’s profits technically belong to you!
Think of this arrangement as a “backdoor SPAC” — giving you the chance to profit from deals that typically wouldn’t be available to individual investors like you and me.