PENSCO Insights for Financial Professionals. Investing in Private Equity with Retirement Funds

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1 PENSCO Insights for Financial Professionals Investing in Private Equity with Retirement Funds

2 A New Way for Prospects to Invest in Private Equity Tapping into personal retirement funds As more investors become aware of the potential gains that can be generated by private equity deals, interest in these types of investments is steadily growing. However, many investors may not have the liquidity needed to meet the minimum investment requirements that are typical with most private equity deals. What if your clients had access to a source of capital that they did not realize they could use to directly invest in non-exchange traded assets? Personal retirement funds (Traditional IRAs, Roth IRAs, SEP-IRAs, etc.) are an often overlooked source of capital because most investors mistakenly believe they can only use these funds to invest in stocks, bonds, or cash but it is possible for your prospects to use their tax-advantaged dollars to invest in private equity. This source of capital also presents an opportunity for asset sponsors and capital raisers to target new sources of funding by tapping into the billions of dollars currently held in retirement funds. What if your clients had access to a source of capital that they did not realize they could use to directly invest in non-exchange traded assets? PENSCO Private Equity Guide

3 A Multi-Billion Dollar Opportunity Americans hold approximately $7.3 trillion in IRAs 1, and it is estimated that 2% -- or $146 billion -- of those funds are held in self-directed IRAs. Unlike traditional retirement accounts, self-directed IRAs allow account holders to make active decisions with their retirement savings. With your help, potential investors can learn how to use their IRA funds to invest in your next private equity deal. Using retirement dollars to invest in private equity provides prospects with the added benefit of investing with tax-advantaged dollars. With a traditional IRA, investors can defer capital gains taxes until it s time to take distributions. In a Roth IRA, account holders can avoid taxes on distributions and capital gains. Nearly 1 out of 4 U.S. households have an IRA¹ $7.3 Trillion Amount of retirement assets held in IRAs 1 $146 Billion 12.4% Estimated size of current self-directed IRA market 2 Average yearly growth of retirement assets since ICI Investment Company Institute data 2 The SEC estimates 2% of all IRAs are self-directed PENSCO Private Equity Guide

4 Building Your Business Most Americans -- even those who are passionate about investing -- aren t aware that they are able to hold private equity investments in their self-directed IRAs. Knowing that personal retirement funds can be used to invest in these opportunities can give you an edge when it comes to offering the best investment advice to your clients while steadily increasing your assets under management. Knowing that personal retirement funds can be used to invest in these opportunities can give you an edge. Understanding this opportunity will help you to: Stand out from the crowd: Educating clients on how they can use retirement funds to invest in private equity provides you with a unique skill set that will easily differentiate you from competitors. Generate repeat business: You can reach out to your current network to let them know they can invest in private equity using their IRA funds. You will be helping them to build wealth and generate retirement income on a tax-deferred or tax-free basis. Bring in new business: Understanding how to use IRAs to invest in (non-exchange traded alternatives) private equity allows you to market your services to prospects you may have not already reached or even considered. Close more deals: By understanding how to use IRA dollars to fund private equity transactions you will be able to help prospects complete deals that they may have had to otherwise forgo due to a lack of funds. PENSCO Private Equity Guide

5 Common Ways to Invest in Private Equity Using an IRA Account holders can use self-directed IRAs to purchase ownership in everything from micro-businesses to billion-dollar global companies, to newer opportunities such as equity crowdfunding or peer-to-peer lending. There are two primary ways that a self-directed IRA can invest in private equity Through a fund This can include private equity funds, venture capital funds, hedge funds and funds of funds Directly in a company Investors can put money directly into start-up companies, including their current employer, or they can make angel investments. WHAT TYPE OF PRIVATE EQUITY INVESTMENTS CAN A SELF-DIRECTED IRA HOLD? Limited liability companies (LLCs) and limited partnerships (LPs). Private common stocks, preferred stock, options, rights and warrants Private hedge funds and funds of funds Private and non-exchange traded real estate investment trusts (REITs) Foreign private equity Exchange traded funds or funds of funds investing in privately-held companies Convertible notes Debt and equity crowdfunding PENSCO Private Equity Guide

6 Partnering with a Custodian All IRA accounts are held for investors by a custodian or trustee. Regulated custodians, like PENSCO, are equipped to handle the complex record keeping required by the IRS for private equity assets. A good custodian can guide your investors through the complexities of self-directed IRA ownership and help protect against pitfalls, such as fraud and prohibited transactions. The role of a custodian is to determine if an investment can be held in a self-directed IRA and to help investors meet the IRS reporting requirements over the life of the investment. A custodian will assist with the opening and funding of an IRA, and will handle the reporting of investment activity within the account, as well as tax reporting. Because custodians are not fiduciaries, a custodian does not approve or endorse actual investments. That means that your investors and any advisors they choose to work with not the IRA custodian are solely responsible for evaluating the private equity investment s merits and suitability. It is important for your client to conduct their own independent and thorough due diligence before making a private equity investment. A good custodian can guide your investors through the complexities of self-directed IRA ownership and help protect against pitfalls, such as fraud and prohibited transactions. SELF-DIRECTED IRAS: Self-directed IRAs are defined as retirement accounts in which the investor is in charge of making all investments decisions. A self-directed IRA provides investors with greater opportunity for assets diversification outside of the traditional stocks, bonds and mutual funds. (Assets such a real estate, private tax liens and notes can be purchased.) All securities and investments are held in an account administered by a custodian or trustee. ROLE OF AN IRA CUSTODIAN: Does not evaluate the merits of an investment beyond its ability to be held within an IRA. Provides extensive record keeping. Will monitor for prohibited transactions and ensure IRS compliance. Assumes responsibility for the administration process and documentation required to buy, hold and divest alternative assets while in an IRA. PENSCO Private Equity Guide

7 PENSCO Makes It Possible For more than 25 years, PENSCO Trust Company has been helping private equity professionals and their prospects use retirement funds to buy and hold alternative investments in their self-directed IRAs. As a trusted custodian of over $10 billion in assets on behalf of more than 45,000 clients, PENSCO can work with you and your self-directed prospects to create a seamless investment experience. PENSCO s proprietary online Alt-Nav investment tool makes it faster and simpler for your prospects to move self-directed IRA funds into private equity investments. 25 YEARS To start working with PENSCO, please visit or give us a call: PENSCO Trust Company - InvestorsGuide_RealEstate_0115 * Note that the account owner is responsible for making sure the custodian receives all tax bills and statements for other expenses that need to be paid by the IRA. PENSCO Trust Company performs the duties of an independent retirement custodian, and, as such, does not provide investment advice, sell investments or offer any tax or legal advice. Potential clients are advised to perform their own due diligence in choosing an attorney, tax advisor, or any investment opportunity. PENSCO is an A+ BBB Accredited Business. Alternative investments are not FDIC insured and are subject to risk, including loss of principal. PENSCO Private Equity Guide