Public vs. Private Fund Investments
If you qualify as an accredited investor, you may be able to access investments in the private market. One of the ways to do so is through a fund.
Your wealth advisor or online broker typically offers access to a broad range of public funds, including the most common types: mutual funds and ETFs. Unlike public funds, however, private market funds have traditionally been reserved for institutional investors. Investing platforms like Mirai Capital are now making private funds more accessible for sophisticated individual investors that meet certain criteria.
If you’re interested in buying into a private fund, it’s worth understanding the difference between how public and private funds work. Private funds have unique structures and funding mechanisms, as well as specific terminology that you’ll need to navigate.
Understanding Private and Public Funds
At its core, the distinction between private and public funds lies in their accessibility, liquidity, and underlying assets they invest in.
Public Investment Funds
Public funds — for example mutual funds or exchange-traded funds (ETFs) — are perhaps the most familiar investment vehicles. They pool money from numerous investors to invest in securities like stocks and bonds, and sometimes real estate and other assets. Public funds are highly regulated, and offer a high degree of liquidity as you can typically buy or sell shares at the net asset value at the end of each trading day, intraday on a stock exchange, or at predictable intervals. Their holdings are publicly disclosed and they cater to a broad spectrum of investors, often with low fees and minimum investment requirements.
Private Investment Funds
Private funds — such as private equity funds, venture capital funds, hedge funds, or commercial real estate funds — also pool capital from multiple investors, but they invest in a range of assets and are not publicly traded. They can provide admission to otherwise-inaccessible investment opportunities, and allow diversification away from public markets. These assets can include private company stock, like that available on Mirai Capital.
Private funds are generally reserved for “accredited investors” or “qualified purchasers” — individuals or institutions meeting specific wealth, income, or other criteria. This requirement is intended to ensure that investors in these less regulated, illiquid, and risky funds have the sophistication or sufficient wealth to understand the risks and withstand potential losses. Private funds typically require investors to commit capital for a longer period of time than public funds, because there are typically fewer opportunities to redeem their investments. This comes with higher risk, but may also present the potential for greater returns.
Navigating Private Fund Terminology
When you’re assessing whether you want to invest in a private fund, you need to understand what kind of fund you’re buying into, how you’ll commit your capital, and how you’ll receive any proceeds. Private funds have unique structures and funding mechanisms with specific terminology.
Closed-End Funds
The vast majority of private funds are closed-end funds. A closed-end fund raises a fixed amount of capital from investors at its inception, and deploys that capital over a fixed lifecycle. Once the initial fundraising period concludes, the fund generally does not accept new capital contributions or allow redemptions, meaning its capital pool is fixed. Investors cannot easily exit by redeeming shares; instead, they may need to sell their interests in a secondary market. Mirai Capital funds are an example of closed-end funds.
Open-End Funds
Open-end funds do not have a fixed maturity date and allow investors to subscribe for new shares or redeem existing ones throughout the life of the fund. This structure provides liquidity options for investors, although redemptions might still be subject to notice periods or schedules to manage the fund’s asset base.
Subscription Agreement
When an investor decides to commit to a private fund, they sign a “subscription agreement.” This legally binding document outlines the terms of the investment, including the total amount of capital you’re committing to the fund. This committed capital might not all be invested at once. Instead, it might form a pool of “unfunded commitments” that the fund manager can draw upon as investment opportunities arise.
Capital Calls
A capital call (or “drawdown”) is a formal request from the private fund manager to the investors for a portion of their committed capital. When the fund manager identifies a suitable investment opportunity, they issue a capital call, and investors are obliged to provide the requested funds within a specified timeframe. This mechanism means the fund’s financing could be staggered, allowing the capital to be deployed more efficiently as opportunities are identified, rather than holding a large amount of uninvested cash.
Distributions
Distributions are the cash or assets that a fund returns to its investors. These payouts typically occur after the fund sells an investment, such as when a private company goes public or is acquired. They can also occur when an investment generates income like dividends or interest. Distributions can be given in the form of in-kind shares, cash, or a combination of both.
General Steps for Investing in Private Funds
The process of investing in a private fund is more involved than buying shares in a public fund:
- Due diligence and research: Make sure you have information about the fund manager and the investment strategy before you commit to investing.
- Understand the terms of the fund: Every fund has governing documents that lay out its criteria, covering factors like voting rights, fees, and more. No two funds have the exact same terms.
- Accredited investor verification: In order to invest in a private fund, you must meet the specific financial or other criteria to qualify. The fund’s investment manager will confirm your status, but you may be required to make an attestation and potentially provide documentation.
- Sign the subscription agreement: Once you’re satisfied, you’ll sign the subscription agreement, which commits you to providing a specific amount of capital to the fund.
- Fund capital calls: As the fund identifies and executes investments, you’ll receive capital calls and must promptly fund them.
- Review reporting: Private funds typically provide reports on their performance, portfolio holdings, and capital account statements on either a quarterly or annual basis; however, this is not necessarily required.