Private market investments offer opportunities for growth and diversification beyond public markets. However, not all investors can participate equally. Regulatory frameworks classify investors into different categories based on their financial sophistication and ability to bear risk. This post will explore the key classifications: accredited investors, qualified clients, and qualified purchasers, among others. We'll define each, examine their investment capabilities, and identify suitable private market funds and alternatives.
Accredited investors are individuals or entities allowed to invest in securities not registered with financial authorities. They qualify to gain access to a broad range of high-risk, high-reward investments such as private equity, venture capital, hedge funds, and real estate. (1) The criteria for being an accredited investor include:
Accredited investors can access a wide range of private market opportunities, including private equity, venture capital, hedge funds, and real estate. However, these investments can carry higher risks and require substantial due diligence.
In its 2023 report, the SEC indicated that 24.3 million (18.5%) American households now qualify as accredited investors. That is a 16x increase over the number of households in 1982 when the SEC released its exemption for public registration thresholds under Regulation D. (1.1)
Qualified Clients (QCs) meet higher financial thresholds than accredited investors. They are typically subject to fewer restrictions on fees that investment advisers can charge. These investors are well-positioned to benefit from more sophisticated investment strategies that can yield lower fees and custom solutions. The criteria for being a QC have recently been updated to reflect the effects of inflation. (2) They now include:
QCs can access more sophisticated investment strategies and structures, often benefiting from reduced performance fees and better alignment with investment managers.
About 6.6% of U.S. households can be classified as QCs. Moreover, nearly half of the accredited investor households (44.6%) are also classified as QC households. (2.1)
Qualified Purchasers (QPs) represent the highest tier of private market investors. As such, they can access exclusive, large-scale opportunities requiring significant capital commitments. These individual investors must meet stringent financial criteria to qualify as a QP. Most notably, they must be an individual or family owning investments of at least $5 million. (3)
QPs have access to the broadest range of private market investments. They can participate in exclusive and large-scale opportunities that require substantial capital commitments.
Because the criteria for being a QP is so much higher, the percentage of U.S. households that qualify is significantly lower than the other investor types. SEC data from 2023 estimates that about 2.1% of American households are QPs. (3.1) Despite this small percentage, this category controls approximately 42% of all privately held household wealth. (3.2)
Non-accredited investors do not meet the criteria for accredited status. Even though opportunities for participation in the private market are more limited than the other three investor types, non-accredited investors can still diversify their portfolios and participate in certain private market growth opportunities, including:
Understanding the classification of private market investors is crucial for navigating the investment landscape. Accredited investors, qualified clients, and qualified purchasers each have distinct capabilities and access to different investment opportunities. By knowing which category you fall into, you can make informed decisions and leverage the right private market funds and alternatives to meet your financial goals.
If you have questions about various private market investment assets, please get in touch. We host regular educational and information webinars and are glad to answer your questions individually.
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