A private investment fund is a type of investment company that doesn’t solicit capital from retail investors or the general public. Members of private investment companies usually possess a deep understanding of the underlying investments as well as their other options for investing.
Private income funds can invest in a variety of investment vehicles, from ultra-high security, low yield government paper to very safe but more profitable real estate funds. To understand what private income funds are and how they work, let’s dive into the details.
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Private income funds are required by law to meet certain criteria to maintain their status. Generally, these requirements limit both the number and type of investors that can own shares in the fund.
For example, the Investment Company Act of 1940, limited a 3C1 fund to 100 accredited investors, and a 3C7 fund to around 2,000 qualified investors.
The definitions of qualified and accredited were determined by individual wealth tests. Accredited investors needed to have more than $1 million in net worth without counting their primary residence and/or $200,000 in annual income for an individual, and $300,000 for a couple. Qualified investors had to hold assets in excess of $5 million.
This all changed in 2012 with Title II of the JOBS Act, which expanded the parameters of private income funds.
Many hedge funds choose to operate as private investment funds so they can leverage more aggressive trading strategies that managers of public funds avoid because of the potential for investor lawsuits stemming from unreasonable risk-taking on the operator’s part.
There is also no public reporting of positions required for private investment funds, which allows them to avoid revealing their strategic investment hand to the rest of the market, helping lock in profitability.
Often, private investment funds are the vehicles of choice for managing significant family wealth. Extremely wealthy families can create private investment funds to invest the family’s fortunes while enabling the family members to be shareholders. These families don’t want or need outside capital, so there’s no reason to take the fund public.
Until recently, most investors wanting to get into private income funds needed to be not only well-funded but also well-connected. Without insider knowledge of the right deals, investors had no way of knowing what private investment opportunities were out there or how to initiate a transaction.
This all changed with Title II of the JOBS Act. The Act expanded which investors and issuers can transact with each other. Further technology that can be used to facilitate these transactions has become available as well.
The reason these investments are often leveraged by institutional investors, endowments, and the ultra-wealthy is simple—diversification.
Private investment funds can hold entirely different classes of securities for investors than other assets in their portfolios. This means their value may not move in tandem with other assets in your portfolio or the public stock markets, providing a hedge to lower overall volatility while delivering strong returns.
Private income funds are designed to produce passive income on a monthly or quarterly basis instead of paying lump-sum capital gains or appreciation on paper.
Alternative fund models often pay a large return at the close of the fund, typically 5, 7, or even 10 years out. Investors wanting their returns delivered sooner and more consistently often seek out private income funds as a solution.
Private income funds may hold a wide variety of investment assets, from government and municipal bonds to corporate debt obligations and preferred stock. Others even invest in real estate.
Some private income funds choose to invest in real estate. These funds are syndications that enable investors to buy into a collection of properties to spread risk and deliver secure income streams. Let’s dig deeper into how private income real estate funds work.
The best private income funds that invest in real estate usually focus their portfolios on commercial real estate. They also will hold a variety of commercial property types to balance their risk profile. What are the main types of properties you’ll see in these funds?
A consistently high-performance commercial real estate segment right now is industrial and warehouse space. The recent explosion of e-commerce order volume has been driving the profitability of these property investments. As of 2021, there was around a 250 million square foot shortage in supply for this type of space, driving tremendous growth in this segment of commercial real estate.
Multifamily apartment complexes have been proven to deliver consistent returns, and there’s even more stability forecasted as people have gone back to work after the pandemic.
Office space can be secure sources of passive income over the long term as long as the assets are thoroughly vetted prior to closing the deal and the property is in a market with a net positive migration rate.
Retail property can deliver consistent, high-quality returns for private income fund portfolios. The key is finding private income funds that invest in real estate involving high-growth, stable industries like healthcare, grocery, and specialty stores that offer omnichannel fulfillment. These assets can deliver secure and consistent income through various market cycles.
When you’re seeking diversification for your portfolio and need to minimize your risks while still earning a substantial passive income, Saint Investment delivers the best of both worlds.
Our team of real estate experts analyzes every asset, empowering you to leverage our real estate investment expertise. Our real estate funds always provide detailed reporting and operational transparency so you can earn real estate income with peace of mind.
Call (323) 483-0291 today to learn more!
A master in Investment, Marketing, and Capital Raising.
Nic has honed his focus on the Real Estate and debt markets with Saint Investment Group and pursues large-scale Distressed Asset purchases with his partners and syndications.