An overview of an asset class once reserved for the wealthy elite… the extraordinary return potential … implementation in your portfolio
Earlier this spring, the investment world lost a legend when David Swensen passed.
For 36 years, Swensen served as Chief Investment Officer for Yale’s endowment. He’s credited with revolutionizing the endowment market approach by making big bets on the asset class we’re featuring in today’s Digest…
Private equity/venture capital.
Now, big-picture how did Swensen do?
He generated an average annual return of 12.4%…for more than three decades.
Given how much money he was managing, that’s “hall of fame” performance, and it exploded Yale’s endowment from roughly $2 billion in 1985 to about $31 billion today.
If we dig in deeper, Yale’s endowment team estimates that it has generated $9.5 billion more than the average U.S. university endowment of the past decade.
Here’s Financial Times:
…so-called “private capital” investments in unlisted asset classes such as private equity and venture capital are a major reason for its strong performance.
The venture capital investments (within the endowment) have returned 21.6 per cent a year over the past decade, the endowment estimates.
Given these returns, it’s no wonder that Swensen’s successor, 36-year-old, Matthew Mendelsohn, will be relying heavily on private equity to continue to boost returns. Mendelsohn has allocated 25% of Yale’s entire endowment to venture capital.
***Today, let’s provide more color on this world of private investing
Many still don’t know it, but this asset class is no longer “off limits” to investors like you and me.
Even better, venture capital can offer investors returns that dwarf anything you’d ever see in the public stock market.
Instead of investing in something traded on, say, the Nasdaq, and hoping for 40%, 75%, or even 100% returns, private investing can return a 2,000%, 3,000%, or 4,000% winner…or even something vastly bigger.
And to be clear, I’m not pulling these multi-bagger returns from thin air. They’re actual returns generated by a 35-year-old private deal investor named Cody Shirk, who I recently had the pleasure to interview.
Here’s Cody’s path from rags to riches in his own words:
I grew up in Malibu. I’m not wealthy. I grew up in a trailer, so I didn’t come from money at all.
I became a firefighter in Santa Monica and made surprisingly good money for a blue-collar worker. I wanted to put my money to work, so I decided to learn investing. I did the whole newsletter world and read all the books.
But with stocks, the takeaway seemed to be “I can probably get rich by the time I’m 50 or 60.” And that’s a great route to go, but I’m more impatient. I like to attack things.
So, I started diving into the whole private equity world.
Fast-forward a few years, and Cody now runs a private investing group and has done deals all over the world.
He also has a growing list of 1,000%+ winners under his belt – and keep in mind, they didn’t require decades to develop. In fact, one of Cody’s most recent 30X-winners took less than one year.
Given the many benefits of this asset class, we’re going to be featuring it more here in the Digest. Whether it’s our own insights, or tips from Cody, our goal is to provide you another way to achieve your investment goals.
Here’s Cody on why venture capital should interest you, and why now is a great time to begin:
If you look at the elite, wealthy part of society, almost all of them gained the majority of their wealth from starting or owning a private company or investing in private companies.
With new RegA+ and Reg CF fundraising opportunities, investors no longer have to be accredited to participate.
With the growth of Crowd Funding platforms that are offering real equity in promising companies, investors now have a completely new option to allocate a portion of their capital to opportunities that can provide life changing returns.
A $5,000 investment that gives a 20x return in a couple years can provide a larger return on investment than most people make in a single year. Furthermore, the annualized return on these kinds of investments can be in the hundreds of percent.
So, today, we’re bringing you the first in a two-part Digest series that features my interview with Cody. It’s a fantastic introduction to the world of private investing from one of the most knowledgeable, experienced private investors out there.
If you’re serious about optimizing your portfolio returns and diversifying your wealth, this series is for you.
Let’s jump in.
***Tapping into the elite world of private placement investing
Jeff: So, Cody, big-picture, why should our readers care about the world of private investing?
Cody: The goal of investing is to maximize your returns. And in order to do that, you obviously have to balance risk with opportunity.
The majority of people are focused on the stock market, which is fine, and then they have diversification through precious metals and whatnot. But if you want to get a balanced portfolio that has growth, you need to include private investing.
Traditionally, that’s been unavailable because of SEC regulations with the accredited investor requirement. But due to recent changes, it already has changed, it’s now accessible.
There’s the Reg A and Reg CF fundraising routes that people can invest in now. So, for the average investor, they need to be looking at this because it will provide outsized returns, which will increase the overall returns of their total portfolio.
Jeff: So, perhaps the biggest draw to the private market is the returns then. Are they really that much better than what you’d find in the public stock market?
Cody: Absolutely. As a public market investor, you’re not going to do consistent 10X and 20X returns. That’s just not going to happen, especially as you start to scale up.
And if you do pull that off, let me know, because you’re either the best trader ever, or you’re massively wealthy.
Jeff: But my impression of the private markets is that, in order to land those monster returns, you have to put money into lots of deals that won’t really go anywhere.
I’ve even heard that about 80% of private deals may lose money, about 15% or so will okay, meaning double your money or less, but it’s only a handful of deals that will be monster, skyscraper returns, pulling up your entire portfolio average.
Cody: That’s exactly how it works. How it plays out is different because it’s an emotional roller coaster through that whole process.
There are two downsides with private investing. One, is that you can lose your entire investment within a single allocation. You invest in a company, the company goes bankrupt, you’re done. That’s scary for a lot of investors to think about.
The second thing is there’s no liquidity. So, you put your money into a company and you cannot get your money back until there’s a liquidity event. That event is typically an acquisition or going public. Having no liquidity is also scary.
But investors need to understand the potential payoff. That windfall liquidity event in a private company can have a 10X, 20X, 30X or more return.
And what you asked “do 20% of the companies have monster returns? Do 10%?” It’s smaller than that. Maybe 1 out of 10, 1 out of 20.
But that one win, that big return is so enormous, that it overshadows all the losses you have in other private companies.
Jeff: Can you give us an example of one of your own enormous returns?
Cody: I invested while MindMed was private. MindMed is a psychedelics company and they’re now valued at – I don’t know where the market cap is at. It’s well over $1 billion. Let’s just say their market cap, or their valuation, was not close to that when I invested.
(Editor’s note: MindMed is valued at $1.26 billion at the time of this writing.)
That was around a 30X or 40X. It’s been very, very good. I definitely should have put a lot more money in.
Jeff: And how long did that take you?
Cody: Less than a year.
Jeff: That’s fantastic. Congrats. So, let’s try to make this as beneficial and actionable as we can for our readers. How can they start getting involved today?
Cody: My answer is probably not what most people want to hear, but there is a good part to it.
The answer is, you do not want to jump into this, like, “All right, I’m doing this. Let’s go full bore.”
You do not want to do that. You want to ease into it. You want to start in the shallow end and just slowly walk to the deeper water.
The best thing to do is start browsing. There are a few private investing platforms I’d recommend – WeFunder, Republic, and SeedInvest.
Those three platforms are fun. You can literally go browse through deals just as if you were looking at a magazine with cool bicycles or something. Think of it as window-shopping, looking at what kind of deals are out there.
Look at what companies are raising money. One of the very interesting things about the private markets is that typically the private markets represent the newest trends. Whether it’s longevity, crypto, AI, 5G, or any of these internet-of-things type trends, the private market is where those things are happening.
So, just go on these platforms and window-shop.
Spend time researching the founders. Who are these people? Where are they from? What’s their track record like? Where did they go to school? Did they even go to school? That’s something you can just search on LinkedIn, super simple.
Then look at their idea. Does it sound promising? Are there competitors? Just very simple stuff like that.
I’d say after a considerable amount of time, let’s say a month or so, you can start to pick some deals. You could say, hey, I really believe in this deal.
Of course, every private investor or fund always has a specific sequence of things they want to do in order to do their due diligence. Everybody’s different.
Jeff: Thanks, Cody.
***Tomorrow, we’ll be featuring the second part of our interview
With the big picture out of the way, we’ll be diving into red flags Cody sees when vetting potential deals… how long the private deals typically last from money-in to money-out… the threat of inflation… and what may happen to private deals if the stock market rolls over.
In the meantime, check out the platforms Cody just highlighted and begin to familiarize yourself with this world. This is an asset class that definitely deserves a home in your portfolio.
Have a good evening,