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Why Private Companies are Attracting New Investors

new-investorsA good number of mutual funds are subtly holding shares of hot private companies, hoping to profit if the fledging companies decide to go public or are bought.

The reality is that in today’s market, diversity is more important than ever – even with companies that are not publicly traded. Sometimes taking advantage of the cutting edge investment trends means breaking away from the mainstream to listen closely to what’s happening at thriving, privately held companies.

For example, fast food company Smashburger has recently been gaining attention because of its quick growth nationwide. With 220 locations in 29 states, Smashburger is perhaps the fastest new burger chain in the country. Growth has swelled in 2013, reflecting the company’s consistent strategy since its foundation. Companies like Smashburger might not be publically traded, but provide huge opportunities for investors.

Still, many investors are cautious about the risks of investing in a private company. Since the JOBS Act passed, more investors have bought equity in private companies. The risk lies in that if the company does not sell the shares or pay a dividend on what you invested in, there won’t be a return check. This isn’t like the stock market where you have the option of selling your shares based on market price. However, shares of private companies have always been a high risk, high reward game.

More recently, the initial public offering market has cooled, fueling the popularity of investing in a private firm. Investing in private companies has taken its place, especially when the company has smaller caps. Furthermore, the likelihood of a company going public provides incredible potential for large returns. For instance, private firms like Firsthand Technology Value and Global Locate were purchased by public companies and saw their values double.

Staying Clear of Potential Issues

Still, the pressure of the SEC’s limit coupled with valuation and liquidity considerations can create problems for these funds. The largest issue is that the fund isn’t allowed to seek out private companies to invest in once it goes over the SEC limit. This results in a shakier fund where its holdings can be significantly undervalued.

The reality is that private equity deal flow in the United States has been proven to be highly lucrative for investors, but that market peaked in 2007. Only now in 2013 are private equity investments picking up. While they might not reach the levels of 2007 any time soon, the deal flow is often friendly for investors and hot sectors such as healthcare and technology provide incredible promise.

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