BALANCING POTENTIAL RETURNS AND RISKS

BY ED MOLDAVER

Over the past 25 years, private equity deals have provided sophisticated investors that are qualified to invest in private equity with, on average, returns that have outperformed the performance available in the public markets. While during that time, there have been periods where private equity underperformed the public markets, whether due to the industry they were investing in, the economic climate, or the specific strategies employed by the private equity firm, private equity has provided investors with an alternative to the public market to seek out gains. Market data shows many “Unicorn” type companies, which are high-growth, innovative firms valued at $1 billion or more, are staying private longer and delaying IPOs. The benefit of this delay is that these private companies are less burdened by regulatory pressure, have less pressure from activist investors, and are able to keep their trade secrets close to their chest. Examples such as AI companies and emerging technologies illustrate this trend. This shift creates investment opportunities for those with access but demands discipline to succeed. Rigorous vetting and optimized cost structures are critical to improving the probability of success while mitigating inherent risks. Here are a few tips to consider when evaluating opportunities.

Private equity investments (including but not limited to venture capital, private equity, startup stakes, etc.) potentially offer access to investment opportunities that have unique wealth-building potential. Yet, risks like illiquidity and the private market’s opacity, including murky valuations and inconsistent reporting, require sophistication, acceptance of a higher measure of risk, and vigilance. Outsized returns can attract bad actors and unscrupulous practices.

To mitigate these risks, thoughtful and thorough due diligence is a critical undertaking. Investors should vet and evaluate deals thoroughly. If time or expertise is lacking, do not go at it alone, or even at all. It is essential to leverage professional expertise and to focus on and understand every detail before deciding to invest. The small print is just as important, if not more so, than the bold and large font titles and headlines. Filter out advisors pushing hype or empty promises. Scrutinize financials, management teams, and market potential. Demand transparent cash flows and exit strategies. Third-party financial statement audits and legal reviews are essential. More compelling outcomes may come from opportunities made available by well-known institutions and other successful investors. The goal is to prudently evaluate the opportunity, potential upside, and risks. Many a wise and savvy advisor and investor chose to pass on “a deal” to have capital available for a potential opportunity.

Another thing to consider is how to evaluate different investment structures to protect your potential returns, where possible. In certain structures, such as Special Purpose Vehicles (SPVs) which can have hidden fees, shares in “Unicorn” companies can carry steep premiums to fair market value, which often can result in lower expected returns. It is important to determine whether shares come directly from the company issuing them, or their employees, versus secondary illiquid markets. These secondary markets occasionally add on management fees, carried interest, and embedded transaction costs. This can make it so that even if the company performs, a poor cost package may erode those gains. Thoroughly vetting your investments and understanding your costs may help tip the scales in favor of potential success. Skip the hype, master the process, and craft portfolios with confidence, while always being mindful of the inherent risks involved.

Moldaver Lee Cohen Wealth Partners Rockefeller Capital Management

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Information provided for illustrative and educational purposes only. It should not be construed as an investment recommendation, investment advice, an offer of Rockefeller investment advisory or brokerage services, or a projection or illustration of the performance of any particular investment or strategy offered by Rockefeller. Data as of May 2025. DIN #33325315