Should My Portfolio Include Private Equity?

Should your portfolio include private equity? Absolutely not. I know I’m going to receive some flak for that answer, so allow me to explain. (For more, see: What Is Private Equity?)
Let's begin with valuation and liquidity. If there is nowhere to sell, how do you value your investment? (For more, see: Valuing Private Companies.) That’s a scary scenario, but those who believe in private equity — and there are plenty of them — will point out that private equity has been outperforming public equity. This is, quite simply, because private equity tends to outperform public equity during good times. If the investment market as a whole makes a turn for the worse, private equity will be punished more than public equity. (For more, see: Difference Between Private and Public Equity.)
Some of these angel investors are chasing multi-baggers with a minimum $5,000 investment. A lot of people will invest more. In most cases, you need to be an accredited investor, which means two years of $200,000 in income and a minimum net worth of $1 million. The bad news is that the majority of these investors are likely underwater at the moment. They’re all chasing the next Facebook Inc. (FB), failing to realize that there is only one Facebook. Currently, there are approximately 225,000 angel investors in the United States. This is an extremely crowded space, which is never a good sign. But that’s not the worst part. (For more, see: Can I Become An Angel Investor?)

Illiquidity

Remember, private equity is illiquid. This could be seen as a positive because it takes emotion out of the equation — investors won’t sell at the wrong times due to negative news that eventually will be seen as a short-term hiccup. But illiquidity holds more risk than rewards. Most private equity investors must wait five to eight years to see a potential return, and a return is rare because most companies fail. All that money is locked up across some 225,000 investors. When people begin to realize that the market is oversaturated, private equity will fail, and unlike public equity, there will be no way out. (For more, see: What Private Equity Investments Are Out There?)
If you’re not looking to invest in private equity right now but perhaps in the future, there are some advantages:

• Illiquid. Yes, this is also a disadvantage, but eliminating the temptation to sell based on emotion can be a big positive.
• Potential. Investing in private equity allows you to get in on the ground floor (as in prior to an initial public offering). Imagine having invested in Facebook in its early stages.
• Fundamentals. Unlike public equity, there is no speculation trading; everything is based on fundamentals.
• Tax advantages.

The advantages end there. In addition to illiquidity, the biggest disadvantages are a wide bid-ask spread, no access to information unless you’re close with the right people, no regulation, often overstated internal rate of return figures and management trying to raise capital at times that aren’t timely for you. (For more, see: Learn the Lingo of Private Equity Investing.)
There are such things as liquid alternatives, which invest in a variety of assets — including private equity — via mutual funds or exchange-traded funds, but these often are more expensive or less liquid compared to public equity or traditional funds. (For more, see: Investing in Alternative Mutual Funds and ETFs.)

How to Succeed

The only way to succeed in private equity is through diversification. Choose a category you know well (distressed investments, real estate, oil and gas, venture capital, etc.) and invest in the companies that you think have the most potential. If you’re correct on just one, it can offset the losing investments. In high-risk situations, be sure that the expected return is higher. You need to be rewarded for taking on that extra risk. (For related reading, see: Are Your Investments Taking on Unnecessary Risk?)

The Bottom Line

You can invest directly, via a private equity fund or through crowdfunding. However, this is irrelevant for those who are really paying attention to current market conditions. Not only is investing in private equity more challenging than investing in public equity, but the private equity market is in extreme bubble territory. This probably isn’t what many people want to read, but capital preservation is just as important as potential returns. (For more, see: Private Equity a Trendsetter for Stocks.)

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What are the benefits of high net worth insurance?

High-net-worth individuals (HWNI) face unique insurance challenges and tend to gravitate towards different insurance products. Wealthy families have relatively more complicated risk management needs and relatively less obvious needs for catastrophic insurance coverage. The real risk might be overinsuring against minor threats and underinsuring against major ones. The benefits of a high-net-worth insurance policy are largely centered around smoothing out the relationship between needs and coverage.

At-Risk and Underinsured

HNWI often have expensive possessions and hobbies – wine collections, art, racehorses, yachts and old cars – that are easy to forget to insure. Even if they are insured, most don't do the leg work to find out what a possession's actual market value is; the insurance doesn't fit the possession.
A good high-net-worth insurance agent diligently notes all hard-to-replace possessions, finds a way to appraise them accurately and offers an insurance solution that covers against the right risks.
Good high-net-worth insurance policies can safeguard against cleaning accidents or theft by the cleaning staff. In fact, a HNWI might want to cover his assets against suit from an employee or service agency. This is known as employment practices liability coverage, or, more colloquially, nanny coverage.

Estate Taxes

Most high net worth carriers don't offer life insurance. Many HNWI don't actually believe that they need life insurance; after all, if they die, their estate is probably large enough to financially protect their children and spouse.

It's easy to overlook the obvious benefits. The not-so-obvious benefit of life insurance is that it helps save on estate taxes. For HNWI, it can save hundreds of thousands or millions of dollars.
Estate taxes for the wealthy are incredibly high. Standard rates are 50% of net worth or higher, and those who improperly protect their possessions or fail to name beneficiaries can lose a lot more than that.
If, for example, an individual dies with $10 million in assets without any life insurance, the entire balance may be subject to estate taxes. Five million dollars or more are at risk. However, current federal law allows up to half to be passed on, tax-free, to the spouse or children. In this case, only the remaining $5 million would be subject to estate taxation. This could save the HNWI $2.5 million in taxes.

High Value Homeowners Insurance

Even for HNWI, the home tends to be the most valuable asset and the most important to cover. In most states, high value homeowners insurance coverage contains an allowance for jewelry or other lost valuables. HNWIs should maximize their benefits whenever possible within fewer insurance products, if only for simplicity.

Those with multiple homes in multiple markets should probably find individual coverage for each property. State and local ordinances, regulations, and homeowners associations all influence the possible and necessary benefits required in a policy.

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Extortion Insurance: Is It Worth It?

If you look hard enough, you can find insurers willing to protect your business against virtually any calamity – from malpractice to equipment breakdown. But even in today’s crowded insurance market, the need to safeguard against extortion might seem like a bit of a stretch.
That is, until you look at international crime trends. Between 15,000 and 20,000 kidnappings take place around the world in a given year, according to insurance giant Aon. Most of these are done not for any ideological reason, but for profit. Often, an overseas traveler becomes a target because an assailant knows there’s a wealthy family or company that’s willing to pay for his or her safe return.
Extortion insurance is designed to help recoup whatever money has to to be paid by a policyholder in order to save someone – an employee, for example – from the threat of abduction or bodily harm. (If the abduction actually happens, the crimes then include kidnapping.) The policy may also protect against other threats, such as damage to company property or the disclosure of sensitive information. Given the risk – particularly in danger zones like Latin America and the Middle East – most big corporations today have a policy that covers both extortion and ransom demands.

Is It Worth It?

A specialty insurance policy can help companies recoup most of the expenses associated with an extortion plot. Often, that includes the money they directly pay to an assailant – or would-be assailant – as well as the cost of negotiators, lawyers and psychiatric care for any victims. Many insurance companies also offer crisis management services through an affiliated provider.
Extortion coverage isn’t strictly for corporations, however. Some insurers also provide policies to high net worth individuals, who can be just as big a target when they travel abroad. Generally speaking, the greater one’s public profile, the bigger the risk.
Certainly, extortion insurance isn’t something that every company or wealthy individual is going to need. And it can be very pricey.

But considering that experts say the threat is only increasing as criminals become more sophisticated – some even use social media sites to glean information about potential victims – this insurance is worth considering if you or a business is at greater-than-average risk. Added protection may be valuable, for example, if you or a company's employees routinely travel to hot spots like Venezuela or parts of Africa. There’s also the financial threat to factor in (even for the most profitable firms), as monetary demands have gone as high as $125 million.

Caveats About Coverage

One point to bear in mind is that extortion insurance almost certainly won’t reduce anyone’s risk of becoming a victim. In many cases, employers can’t even let their workers know about the coverage, which would make them ideal targets for criminals.
Also, if you’re thinking about buying a plan for yourself or your business, be advised that filing a claim isn’t always as straightforward as you might think. One complication is that most kidnappers specifically prohibit their victim’s contacts from notifying either the police or the insurance company about their demands. The catch: The insurer may not provide reimbursement if it’s not advised of the transaction ahead of time.
Therefore, it’s important to find a policy without this kind of stipulation, or to try to negotiate it out of the contract. Some insurers only require policyholders to divulge an extortion attempt when doing so won’t further endanger a victim.
In addition, some companies won’t extend coverage to countries where the U.S. government has put into effect a travel advisory. In such cases, there’s an unfortunate irony: The policy may be useless in the very circumstances when it’s most needed.
For potential policyholders, these caveats are all the more reason to research the insurance plan ahead of time to avoid surprises down the road.