What it is
Private markets are investments made outside public stock and bond exchanges. They can include private equity, private credit, real estate, venture capital and other strategies, often held through a private fund that pools money from eligible investors.
For wealth advisors, the topic is about understanding how these funds are structured, who may be eligible to participate, what the terms mean, and how they fit, or do not fit, within a client's overall situation. Many private funds are offered only to accredited investors under SEC Rule 501(a).
Rule 501(a) includes several categories. These include individuals who meet the income or net worth tests set out in the rule, holders in good standing of Series 7, 65 or 82 licenses (added by the August 2020 amendments), and knowledgeable employees of certain private funds. They also include spousal equivalents in joint calculations, entities and family offices with over $5 million in investments or assets, and registered investment advisers and exempt reporting advisers.
How it’s traditionally been approached
Advisors have often approached private markets by building relationships with fund sponsors, attending industry conferences, and relying on their firm's research or due diligence teams. Larger firms and family offices may have dedicated staff, while smaller practices may lean on outside resources.
Private offerings are commonly made under Rule 506(b) or Rule 506(c). Under 506(b), the issuer may not use general solicitation. Under 506(c), general solicitation is allowed, but all purchasers must be accredited and the issuer must take reasonable steps to verify that status.
Some advisors consider funds of funds or secondaries as ways to learn about the space, while others review individual funds directly. Due diligence traditionally looks at the manager's background, strategy, fees, terms, liquidity limits, reporting and legal documents. Investors in some structures receive Schedule K-1 tax forms, and some company investments may involve Section 1202 (QSBS) rules. Tax treatment depends on individual circumstances.
How the right fund manager may help
The right independent fund manager or due diligence provider may help an advisor organize a complex topic. A conversation can be a chance to understand a strategy in plain language, see how the fund is structured, and learn how the manager thinks about risk, communication and conflicts of interest.
Questions advisors often bring include: How is the fund structured and who is eligible? What are the fees and how are they described in the offering documents? How long may capital be committed, and what limits exist on withdrawals? How are valuations determined, and how often are investors updated? What does the manager's reporting look like, and what tax forms should clients expect?
A good provider may also welcome your questions about their process, be clear about what they cannot promise, and point you back to the offering documents and your own licensed attorney, tax professional and compliance team. Any offering is made only by the issuer through its own offering documents. The Hastings Fund is an independent directory and does not recommend, endorse or rank any manager or investment.
The bigger picture
Decisions about private markets can affect more than a portfolio. Advisors and clients may feel pressure, curiosity or uncertainty about unfamiliar investments, and money held in hard-to-sell assets can influence a person's sense of flexibility and peace of mind. Taking time to understand the topic can support calmer, more confident conversations.
A whole-person view considers a client's goals, comfort with risk, need for access to cash, family circumstances and stress levels, not only the investment itself. Traditional public-market approaches and private approaches each have a place in different situations, and neither is better for everyone. Where relevant, wellness and support resources such as Providers.plus can complement the financial side of planning.
Keep in mind
- Private fund investments are speculative and illiquid and can lose all of their value.
- Past performance does not guarantee future results, and no fund or manager can promise any outcome.
- Eligibility rules apply, and many private funds are limited to accredited investors under SEC Rule 501(a). Any offering is made only by the issuer through its own offering documents.
- This page is educational only and is not an offer or solicitation to buy any security. Consult your own licensed investment, legal and tax advisers, as tax treatment depends on individual circumstances.
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Create an investor account →Frequently asked questions
What are private markets for wealth advisors?
Private markets for wealth advisors refers to the investments outside public exchanges, such as private equity, private credit and real estate, that advisors learn about and evaluate for eligible clients. They are usually held through private funds. They are speculative and illiquid and can lose all of their value.
Who can invest in a private fund?
Many private funds are limited to accredited investors as defined in SEC Rule 501(a). Categories include individuals meeting the rule's income or net worth tests, Series 7, 65 or 82 license holders, knowledgeable employees of the fund, entities and family offices with over $5 million in investments or assets, and RIAs and exempt reporting advisers. Eligibility depends on the specific offering and the facts of each investor.
What is the difference between Rule 506(b) and Rule 506(c)?
Rule 506(b) does not allow general solicitation, while Rule 506(c) does. Under 506(c), all purchasers must be accredited and the issuer must take reasonable steps to verify their status. Your attorney can explain how these rules apply to a specific offering.
What is due diligence on a private fund?
Due diligence is the process of reviewing a fund and its manager before any decision is made. It often covers the manager's background, strategy, fees, terms, liquidity limits, reporting, and legal documents. Advisors may do this themselves or work with independent due diligence providers.
Are funds of funds and secondaries the same thing?
No, they are different structures. A fund of funds invests in other private funds, while a secondaries strategy generally involves buying existing interests from other investors. Each has its own terms, fees and risks, which are described in the offering documents.
Do private funds create special tax forms?
Some private funds issue Schedule K-1 forms to investors, which can affect how and when tax returns are prepared. Certain company stock may also involve Section 1202 (QSBS) rules. Tax treatment depends on individual circumstances, so consult your own tax professional.
Educational resource. The Hastings Fund shares general information and connects people with independent fund managers. It is not professional advice. Talk with a qualified professional about your own situation.