An accredited investor has access to potentially risky investments off limits to retail investors, but is less likely to do so in the current economy. Learn more.
An accredited investor has access to private investments offering the possibility of big gains or just as big losses, but such high-risk investments appear to be losing their allure in the current economic environment, according to recent Millionaire Corner research.
By virtue of wealth or income, an accredited investor is deemed to have the sophistication and resources needed to invest in opaque products, such as hedge funds, private equity and venture capital. The U.S. Securities and Exchange Commission, the federal agency charged with ensuring fair and orderly financial markets, defines an accredited investor as an individual who has a net worth exceeding $1 million, not including the value of his or her primary residence. An individual may also be considered to be an accredited investor if he or she has received an income of more than $200,000 for the two most recent years and reasonably expects to receive that level of income in the current year.
Though the SEC considers millionaires to be qualified to invest in startup companies and other risky ventures, Millionaire Corner research shows that a significant share of ultra-wealthy investors are cooling to such risks. Investors with a net worth exceeding $25 million, well in excess of the federal threshold for accredited investors, say they are significantly more likely to invest in individual, publicly traded stocks, mutual funds, money market funds or checking accounts than in alternative investments over the next 12 months, according to our newly released $25 Million Plus Investor 2012.
What about products reserved for an accredited investor? On average, $25 Million Plus investors allocate 25 percent of their investable assets to alternative investments, but their investment in many types of alternative products has fallen sharply over the past two years. Investment in private placements, the sale of securities to a limited number of institutions and accredited investors, has fallen from 49 percent in 2010 to 37 percent this year, according to our research, while the average mean value of the private placement investments went from more than $4.8 million to less than $2.6 million over the same period.
The $25 Million Plus group has also reduced their exposure to hedge funds, venture capital and private equity. More than half describe themselves as moderate investors, willing to accept little or no investment risk.
What’s causing $25 Million Plus individuals to take off their accredited investor hat? The vast majority are deeply concerned about the U.S. economy. More than three-fourths say the economic downturn has been a “major concern” for the past two years, according to our research, and less than 40 percent believe the economy is going to get better any time soon. Perhaps an accredited investor needs confidence in the economy even more than wealth when it comes to making speculative investments.