Crowdfund Investing: An Exciting New Alternative for Individual Investors
by Louis C. Gerken and Thomas C. Gray
Indexing and thoughtful asset allocation are solid choices for most individual investors’ core holdings. But for those seeking exceptional gains on a long-term investment horizon, alternative investments like private equity—including venture capital—can offer an uncorrelated, value-based, and often highly lucrative, complement to the otherwise staid 60% stock/40% bond investment plan.
Historically, only high-net-worth individuals and institutional investors, including pension funds and university endowments, have been able to enjoy the 600+ basis points of annual incremental return that private equity and venture capital investments deliver long-term over traditional asset classes (exchanged-listed stocks and bonds). Meanwhile, an estimated $5 trillion in U.S. individual retirement and personal investing accounts has been restricted to those traditional asset classes. Now, Title III of the 2012 Jumpstart Our Business Startups) Act is poised to change the game by allowing unaccredited investors to participate directly in equity-based crowdfund investing.
Crowdfunding, the pooling of capital from many individuals to financially back a cause, project or company, started mostly as a way for individuals to conveniently support social causes and artistic projects by donating online (commonly referred to as donation-based or reward-based crowdfunding). However, crowdfunding has evolved rapidly into what may well become a viable investment vehicle that connects investors in search of portfolio diversity and higher returns with entrepreneurs and small-to-mid-size enterprises ( Figure 1 shows the tremendous growth of crowdfunding in recent years, including the accelerating growth of crowdfunding capital raised with the hope of financial returns (commonly referred to as crowdfund investing).) in search of capital to develop their ideas and expand their businesses.
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Thomas C. Gray is an analyst with Gerken Capital Associates .