Carlyle Group’s Rubenstein Predicts Relaxation of Rules Limiting PE/VC Investments to Accredited Investors

Gregory Roth, a senior editor with our friends at Buyouts Magazine, posted an article on PEHUB yesterday about some comments made at the New York Times’ DealBook conference.   The comments, by David Rubenstein, co-head of The Carlyle Group, essentially support an argument that we, at DailyDAC, have been making for nearly a year:  soon, perhaps within the next five years, the rules prohibiting non-accredited investors from investing in assets like private equity will become relaxed.   See the entire post on PEHUB.

However, we disagree with Rubenstein’s prediction.

Rubenstein did not consider the millions of accredited investors who do not  invest- who have never invested- in PE, VC, PPMs, or other investments one must be an Accredited Investor to participate in.

The JOBS Act (which we started covering in April) is going to change that.

Our research shows that for every AI who has made an investment,  there are at least ten who never have done so.  Why is this?  Sure, some people are simply risk adverse and perceive such investments as being inherently more risky than investing in publicly traded stocks and bonds.

The  truth is that the Securities Laws prohibiting general solicitation have kept the vast majority of AIs in the dark about the world of opportunities that being an AI provides.  Think about it:  assume you are an AI but you:

  • Do not live within driving distance of New York , LA, or a small number of other money center cities;
  • Did not attend an elite university;
  • Are not a corporate lawyer, investment banker, or the like; and
  • Are not a member of a country club or elite group.

If this were you, you likely would not have  been exposed to the PE, VC,  or the like as an investment opportunity.  Why?  The ban prohibiting general solicitation!

Well, thanks to the JOBS Act of 2012, the ban will soon be gone.  Soon, every AI in the country will be hit over the head by firms seeking their investment dollars and by news and media outlets singing the praises of this “new” investment class.

Any smart financial professional can attest to the fact that given the right time horizon, there is nothing more inherently risky about those investments limited to AIs as compared to all other investments.  In fact, most would argue that proper, responsible diversification requires some exposure to the class.  Certainly, the 2007 collapse and the volatility of public securities that has followed in its aftermath has demonstrated some of this.

As the educated reader knows, the JOBS Act will also birth crowdfunding for the masses.  Together with the lifting of the ban against general solicitation, securities regulators are going to have their hands full digesting all the resulting consequences, intended and unintended alike.

Bottom line:  the experiment that is the JOBS Act is going to have to yield some data before things are loosened up even more.  Doing otherwise could lead to 1929 all over again.

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