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Freedom for Retirement™ is the podcast designed to help you move beyond the fear of the complexity of finances so you can be financially free to achieve personal significance. Tune in with Josh Duncan each week to turn fear into fuel that drives you into Freedom & Significance.
Welcome to the Freedom for Retirement podcast. If you're a high earning professional, business owner, or someone approaching retirement and wondering whether you are truly on track, you are in the right place. This podcast is all about helping you make smart, confident financial decisions without the fear, confusion, or sales pressure that so often comes with money advice. Each episode is designed to break down complex topics like retirement planning, investing, taxes, and cash flow in plain English so you can understand what really matters and avoid the most common and costly financial mistakes. Everything you hear here is educational, fiduciary focused, and grounded in real world planning experience working with clients just like you.
Josh:I'm your host, Josh Duncan, partner at F5 Financial Planning. Let's get started. Let me ask you a question. Have you ever been at a dinner party or a networking event or maybe just scrolling through your social media feed and someone starts talking about this incredible investment opportunity, something only the ultra wealthy have access to, promising returns that make the stock market look like a savings account? Maybe it was a private equity deal.
Josh:Maybe it was a private placement in some hot new company. And you thought to yourself, why can't I get in on that? I hear this all the time, and I get it. When you're watching your retirement account fluctuate with the market, and someone dangles an idea of double digit returns with a fancy pitch deck and a velvet rope around it, it sounds amazing. But here's what I wanna talk about today.
Josh:Why investing like the so called 1% is not just risky, it could be genuinely dangerous for your financial future. And why the sales pitch sounds a lot better than the reality. Today, I'm gonna walk you through exactly what private equity and private placement investments are, why they're aggressively marketing to regular investors, what the real risk look like under the hood, and how to think clearly about these opportunities when someone puts one in front of you. Because at the end of the day, my job is to protect your financial plan, not to make investing sound exciting. Let's start with the basics, because I think a lot of confusion around these investments start with people not fully understanding what they actually are.
Josh:When most of us invest, we're buying publicly traded securities, stocks and bonds that trade on exchanges like the New York Stock Exchange or NASDAQ. These markets are regulated, transparent, and highly liquid. You can buy shares of Apple in the morning and sell them by lunch if you want. Private equity and private placement investments are the opposite of that. Private equity refers to investments made directly into private companies, businesses that are not listed on any public exchange.
Josh:Private equity funds will pool money from investors, use that money to buy stakes in or acquire private companies, try to grow or restructure those businesses, and eventually sell them, hopefully at a profit. The whole cycle can take seven to ten years, sometimes longer. Private placements are a related concept. These are securities like stocks, bonds, or other instruments sold directly to a select group of investors without going through a public offering. A startup might raise money through a private placement.
Josh:A real estate developer might fund a project this way. So might an oil or gas company. These deals don't go through the usual regulatory filing process that a public offering requires. Now, both of these investment types are generally only available to what's called an accredited investor. Investor.
Josh:In The United States, that means you need a net worth of at least $1,000,000, excluding your primary residence, or an annual income of at least $200,000 as an individual, or 300,000 as a couple. The Securities and Exchange Commission created this threshold because they believe wealthier investors can absorb more risk and have the sophistication to evaluate complex deals. In theory, makes sense. In practice, being an accredited investor just means you cleared a financial bar. It doesn't mean you fully understand what you're getting into.
Josh:Now let's talk about why these investments get so much attention because, honestly, the marketing is excellent. Here's what the pitch usually sounds like. The public markets are volatile. Institutional investors, the Harvard endowments, the pension funds, the sovereign wealth funds, they don't just rely on stocks and bonds. They allocate a significant portion of their portfolio to alternative investments, including private equity.
Josh:And historically, private equity has outperformed public markets. So why wouldn't you wanna access to the same thing? And you know what? There's a kernel of truth in there. Certain private equity funds, particularly the top tier most exclusive ones, have generated impressive long term returns.
Josh:The Yale endowment model, made famous by David Swenson, did outperform traditional portfolios for many years using heavy allocations to alternatives. But here's the part the sales pitch leaves out. Yale has a twenty plus year investment horizon. They have a full team of sophisticated analysts. They have access to the very best fund managers, the ones the rest of us simply cannot get into.
Josh:And most critically, they can afford to lock up capital for a decade without blinking. The pitch you're hearing at the dinner party, it's not Yale. It's something very different. And the comparison is doing a lot of heavy lifting. People are often drawn to these investments at a specific moment in their financial life when they feel behind.
Josh:Maybe they got a late start on saving. Maybe the market has been choppy and they're frustrated. Maybe they've run retirement projections and the numbers don't look great. And suddenly, the promise of superior returns feels not just attractive, it feels necessary. Like this is the only way to catch up.
Josh:That emotional vulnerability is exactly when you need to slow down and think most carefully. Okay. This is where I wanna spend the most time, because understanding these risks is the whole point of today's conversation. Risk number one. These investments can have binary outcomes.
Josh:When I say binary, I mean this. You either make money or you lose money. Sometimes a lot of money. Sometimes all of it. There's no middle ground where you at least get your principal back.
Josh:Unlike a publicly traded stock that can decline but still retain some value, a failed private company investment can go to zero. The company goes under. The deal falls apart. The market shifted. Whatever the reason, and your capital is gone.
Josh:Some private equity investments do generate strong returns, but the distribution of outcomes is extremely wide. The best deals are home runs. The worst deals are complete strikeouts, and a lot of deals land somewhere in the middle. Maybe returning your capital with modest gains after a decade, which isn't nearly as impressive once you account for the opportunity cost of having that money tied up. Risk number two, illiquidity.
Josh:This one cannot be overstated. When you put money into a private equity fund or a private placement deal, that money is locked up. We're talking potentially five, seven, ten years or longer. There's no exit button. There's no selling your shares on a Tuesday because you need the money.
Josh:Think about what can happen in a decade. A job loss, a medical emergency, a divorce, a business opportunity you wanna pursue. Life is unpredictable, and having a significant portion of your assets completely inaccessible is a real problem, not just a theoretical one. Unlike a diversified portfolio of publicly traded assets, you cannot rebalance private investments easily. You cannot shift from private equity to an S and P 500 ETF when your risk tolerance changes.
Josh:You cannot react to changing life circumstances. You're locked in. And risk number three is capital calls. This is one that a lot of first time private equity investors don't fully understand until it happens to them. And it catches people completely off guard.
Josh:Many private equity and private placement structures don't take all your committed capital upfront. Instead, they issue what are called capital calls over time. They ask you to wire additional funds as they identify investment opportunities or need operating capital. You might commit $500,000 to a fund, but they call it in pieces over three to five years. Now, here's the danger.
Josh:If you cannot meet a capital call, if life happens and you simply don't have the liquidity, you can face serious penalties. In some cases, you can lose a significant portion of what you've already contributed. Your ownership stake stake can be diluted or wiped out entirely. Missing a capital call can be catastrophic. This means you need to have substantial liquid reserves beyond whatever you've committed to these investments.
Josh:Not everyone who meets the accredited investor threshold has that kind of cushion. Risk number four, lack of transparency and valuation challenges. With public investments, you know exactly what your portfolio's worth every single day. With private investments, valuations are infrequent, often quarterly at best, and done by the fund itself using internal models. You may not truly know the health of an investment until it's too late to do anything about it.
Josh:And let's talk about fees for a moment. Private equity typically charges what's called a two and twenty structure. 2% of assets under management annually, plus 20% of profits above a certain threshold. When you layer that on top of already high risk and illiquidity, the net return to the investor needs to be spectacular just to justify the cost. Risk number five, extended timelines and the opportunity cost problem.
Josh:Even when private equity investments work as planned, a timeline is long. If your money is locked up for seven to ten years, that capital isn't growing in a diversified liquid portfolio. It's not being rebalanced. It's not benefiting from dollar cost averaging or compound interest in a predictable way. The public markets aren't perfect.
Josh:But over long periods, diversified equity portfolios have generated solid returns with far more transparency, flexibility, and liquidity than private alternatives. Here's the honest truth that nobody in the sales meeting is gonna tell you. The ultra wealthy, the true 1%, can absolutely afford to allocate a portion of their portfolio to private equity and private placements. Not because these investments are less risky to them, they're not. But because they have the financial capacity to absorb a total loss and not have it materially change their life.
Josh:If someone has a net worth of $50,000,000 and they put $200,000 into a private equity deal that goes to zero, that's painful, but it's not catastrophic. Their lifestyle is intact. Their retirement's intact. Their children's inheritance is intact. Now imagine a dual income couple with a net worth of $2,000,000, most of it in retirement accounts in a home, who gets excited about a private placement and puts $200,000 in.
Josh:That's 10% of their net worth. If that deal blows up, and some of them do, they have dramatically altered their retirement trajectory. That's not recoverable in the same way. There's an old saying in finance, don't invest money you can't afford to lose. For most private equity and private placement deals, that's not a cliche.
Josh:It's a literal prerequisite. If losing this investment would fundamentally harm your financial plan, you should not make this investment, period. And look, I wanna be clear that I'm not dismissing everyone who wants to explore alternatives. If you have substantial liquid assets beyond your core financial plan, if your retirement is funded, if you have proper emergency reserves, and if you genuinely have the sophistication and bandwidth to evaluate these deals, then maybe a small allocation makes sense. We have that conversation with some clients.
Josh:But that's a very different conversation than someone who feels behind on retirement and sees private equity as the answer to a math problem. That's a recipe for real financial pain. So let's make this practical because these deals are gonna keep coming. A colleague will mention something. Your brother-in-law will have a can't miss opportunity.
Josh:You'll get a prospectus from a broker you've never worked with. Here's the questions you need to ask. Question one, can I afford to lose every dollar of this investment? Not probably lose it, not most of it, all of it. If the answer is no, if losing this money would affect your retirement, your lifestyle, or your financial security, then stop right there.
Josh:The answer is no. Question two, do I understand what I'm actually investing in? Not just the pitch, not the projected returns. What is the underlying business? What are the specific risks?
Josh:What are the fees? What happens if the company underperforms? What are the terms if I miss a capital call? If you can't answer these questions clearly after reading the offering documents, that's a problem. Question three, what is the liquidity timeline and does it fit my life plan?
Josh:Think about what might happen over the next seven to ten years. Do you have the financial flexibility to have this money locked up through all of it? Question four. Who is selling this to me and how are they being compensated? Many private placements generate large upfront commissions for the brokers and advisors who sell them.
Josh:That's not automatically a disqualifier, but it's information you need. As a fee only fiduciary, I'm not compensated by the investments I recommend, which means my advice is not influenced by what generates the highest commission. Not everyone you'll meet operates that way. Question five. And this is the big one.
Josh:If this sounds too good to be true, it is. The old adage exists for a reason. Superior returns always come with superior risk. There's no investment that consistently beats the market with low risk and no strings attached. If someone is presenting it that way, something is being left out of the story.
Josh:I've seen clients come to me after they've already made these investments, and sometimes it works out. But I've also sat with people who had to delay retirement because a private placement blew up, or who are trapped waiting for capital to be returned on a timeline they no longer have patience for. Those conversations are hard, and often they were preventable. Alright. Let's bring this home.
Josh:Here are the five things I want you to take away from this video today. Number one, private equity and private placements are complex, illiquid investments that lock up your capital for years and have binary outcomes, including total loss. They are not simply a better version of the stock market. Number two, the marketing around these investments is sophisticated and often timed to appeal to investors when they feel most vulnerable. When they feel behind and want a shortcut to catch up, that's exactly when you need the most caution.
Josh:Number three, the risks go beyond volatility. Capital calls, extended timelines, lack of transparency, high fees, and illiquidity all create challenges that most retail investors are not fully prepared for. Number four, the 1% can afford to invest this way because they can absorb a total loss. If you cannot absorb a total loss of this investment without harming your financial plan, you should not take it. Number five, when someone puts one of these deals in front of you, ask the hard questions.
Josh:Understand the fees, the timeline, the downside, and the compensation structure of whoever is selling it to you, And always work with someone who is legally required to act in your best interest. Your job is not to seek out the most exciting investment opportunities, it's to make sure your financial plan actually works. That means protecting the foundation you've built, growing your wealth with appropriate risk, and making sure that one bad investment doesn't derail everything you've worked for. Simple, diversified, low cost investing is not glamorous, but over time, it works, and it lets you sleep at night. If you found this episode helpful, please consider subscribing to the podcast and leaving a review.
Josh:It helps more people find the show and continue learning how to make smarter financial decisions. I'm Josh Duncan, partnered F5 Financial Planning. If you would like to learn more about how we help our clients achieve financial freedom for personal significance, please visit our website at www.f5fp.com. Thanks for listening, and I'll see you in the next episode.