Wealthyist

In this episode of the "Wealthyist" podcast, hosted by Anthony Mlachnik, senior wealth manager for Annex Private Client, the focus is on private investments and their role in a diversified portfolio. Mlachnik is joined by Brian Jacobsen, Annex’s chief economic strategist, to discuss the nuances of private markets and their relevance for high-net-worth individuals.

The episode begins by defining private markets in contrast to public markets. Private markets include investments like private equity, private credit, private real estate, and private infrastructure, which are not publicly traded and thus don’t appear on stock tickers. Jacobsen addresses misconceptions about private markets being inherently riskier or opaque, emphasizing that Annex focuses on aligning investments with clients’ goals through thorough due diligence and understanding the client’s financial objectives.

The discussion highlights the importance of a macro-level investment policy statement, especially for clients experiencing liquidity events, such as business sales or sudden wealth accumulation. Private markets are presented as a tool for diversification, particularly for accredited investors or qualified purchasers who meet specific net worth or sophistication requirements. Jacobsen notes that while public markets offer around 4,000–4,500 companies, private markets provide access to a much larger pool of 40,000–45,000 companies, including innovative firms that may not need public funding due to technological advancements.

The conversation explores why many companies choose to remain private, citing reduced regulatory burdens (e.g., post-Sarbanes-Oxley) and the ease of raising capital through private channels, facilitated by technologies like DocuSign. Private markets offer opportunities to invest in early-stage, disruptive companies—potentially the “next Google or Facebook”—before they go public. However, Jacobsen stresses the importance of due diligence, understanding the investment’s philosophy, process, partners, pricing, and structure, especially when investing through funds managed by general partners.

Mlachnik and Jacobsen also discuss the behavioral challenges of private investments, such as the temptation to overcommit to opportunities presented by friends or networks. A disciplined framework helps investors say “no” when an investment doesn’t align with their strategy. They touch on the concept of the illiquidity premium, where private investments, being less liquid than public securities, often trade at lower valuations to compensate for the inability to sell quickly. This illiquidity can act as a “pre-commitment device,” preventing impulsive decisions during market volatility, akin to Odysseus tying himself to the mast to resist the sirens’ call.

The episode briefly addresses private infrastructure, particularly relevant in Wisconsin due to the rise of data centers. Jacobsen explains that private infrastructure investments (e.g., ports, airports, energy distribution) blend growth potential with income generation, distinguishing them from private real estate, which focuses on physical assets like buildings.

The episode concludes with a reminder to approach private investments with a clear plan and a trusted fiduciary advisor to ensure decisions align with long-term financial goals, rather than chasing trendy opportunities. The discussion underscores the importance of strategic planning, due diligence, and a disciplined process in navigating the complexities of private markets.