Here are 5 mistakes to steer clear of when investing in the private capital market
If you have recently decided to upgrade your investment portfolio by entering the private capital markets, it is only natural to be confused and filled with a lot of doubts. Every professional started out as a beginner and only by making mistakes does everyone learn. However, making a certain set of decisional errors when starting out in the private capital market can prove to be quite dangerous for your precious capital.
To help you venture out on a successful investment journey, here are 5 mistakes that you should definitely steer clear of when starting out in the private capital market -
1) Not maintaining a heterogeneous portfolio
If you are involved in the public capital markets, you might have come across the saying ‘do not put your eggs in one basket’ plenty of times. This astonishingly is even applicable when maintaining an investment portfolio of private market investments. By increasing diversity in your investment portfolio, you can easily decrease the risk of a loss and exponentially increase the return percentage. The private markets are not regulated like their public counterparts and, thus, one needs to pay more heed to various factors, like risk tolerance and interests when making an investment.
2) Ignoring the risk to reward ratio of an investment
If you want to be successful in the private market, pay close attention to the risk involved with the investment. As a rule of thumb, you should also understand the maximum reward potential of that asset. To give you more clarity, investing in a newly established company might look very rewarding if the organization has entered the market with a brand-new product. However, it is also equally dangerous as the chances of failure in capturing the market are equally high. Gauge the various types of risks and rewards involved when making the investment decision and choose the asset that does not cross your risk tolerance limit.
3) Not doing thorough research
Whether you invest in public markets or private markets, understanding the company’s business plans and strategies is very important. You also need to assess the leadership that drives the company and get a clear idea of the legality of the organization. There are plenty of examples in the books of successful investors where they have invested in a company without understanding the various risks involved and as a result, have not made the return they were expecting. It also is important to check if the USP of the business is copyrighted or patented to avoid the competitors from taking over.
4) Ignoring the track record
This is one of the most common mistakes that many newcomers in the private market make. A company that has a poor track record is generally not expected to rebound unless they have some major business changes planned. Though the previous performance is not necessarily concrete evidence of the continuation of the same trend, it can give you a clearer idea of what to expect from the company in the long run. Do keep in mind that a good track record also needs to be backed with a sound strategy if the organization plans on keeping up the good work.
5) Getting impatient
Patience is the key to success not only in life but even in the private capital market. Unlike investing in the public equity market, arbitraging in the private market does more harm than good. Once you have invested in the private market, be ready to have your allocated capital locked for at least a few years before you even get a premature exit point.
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