The Role of Accredited Investors in the Financial Market

The role of accredited investors in the financial market is vital to the financial ecosystem’s health. Their investments often support emerging industries and technologies, fostering economic stability through diverse investments across many asset classes. An accredited investor is an individual or entity that meets specific financial criteria set by the SEC, enabling them to engage in high-risk, high-reward investments inaccessible to the general public. This includes investments in alternative asset classes like real estate syndication investment opportunities. Accredited investors play a crucial role by providing essential capital that drives growth and innovation. Their financial expertise and resources help balance the marketplace. This blog explores how accredited investors impact and shape the financial market.

What is a Retail Investor?

Retail investors can be categorized as either accredited or non-accredited. Non-accredited retail investors face restrictions on their access to various investment opportunities and are subject to limits on the amounts they can invest, as regulated by the SEC. These regulations are designed to protect investors from high-risk investments that they may not fully understand or afford.

An accredited retail investor is an individual investor who conducts trades through traditional or online brokerage firms, other types of investment accounts, or directly with the sponsor.

What Makes an Accredited Investor?

To be considered an accredited investor, you must meet specific financial criteria. Typically, individuals need to:

Have earned an annual income of at least $200,000 (or $300,000 combined with a spouse) in each of the last two years, with the expectation of earning the same or higher income in the current year.
Possess a net worth of $1 million or more, excluding the value of their primary residence.

Accredited investors are considered to have the financial knowledge and ability to handle the risks associated with private investments, like venture capital, private equity, and certain high-yield securities. This status grants them access to a wider range of investment opportunities, which are often more intricate and less regulated.

Can retail investors access private equity investments?

In short, yes. If the retail investor is accredited, they have many investment options, including access to private equity. Non-accredited investors can also access private equity through crowdfunding. This method allows them to invest with relatively small amounts of capital, as it pools contributions from many investors to fund the opportunity.

The Impact of Accredited Investors on Market Growth

Capital Infusion:

Accredited investors play a crucial role in fueling both startups and established businesses. They provide the essential capital needed for these companies to launch and grow. Their investment is often the key to turning entrepreneurial ideas into successful ventures and innovations.

A perfect example of a successful small business in which private equity investors capitalized is Blue Buffalo. In 2006, Invus Group invested $59 million in Blue Buffalo, a key player in the pet products industry. Their strategic backing was pivotal, fueling Blue Buffalo’s explosive growth from $13 million in sales to $1.1 billion by 2016. This success led to an IPO in 2015 and a $8 billion acquisition by General Mills in 2018. Invus’s $59 million investment yielded an incredible 84x return, or $5 billion in profits, with a 51% IRR. Blue Buffalo’s success highlights the power of private equity in driving substantial growth and achieving impressive returns.

Market Liquidity

Accredited investors significantly inject capital into various financial markets, including private equity, real estate, and other alternative investments. Their investments help absorb market fluctuations and provide a steady capital flow, enhancing overall market liquidity and supporting residual income generation. This capital infusion stabilizes markets by ensuring enough buyers and sellers, which can mitigate extreme price swings and promote smoother market operation.

A Rise in Accreditation

The rise in accredited investors is boosting market liquidity and stability, which could be why the current recession is milder than economists initially expected. According to a CNBC report, in 2022, over 24 million U.S. households—18.5%—qualified as accredited investors, a sharp increase from 13% in 2019. This growth, driven mainly by inflation, infuses more capital into the market. With more accredited investors actively participating, the market experiences greater liquidity and stability as they invest across various asset classes. This increased capital flow helps buffer the market against extreme volatility and supports smoother economic adjustments. As a result, the market’s enhanced resilience might be a key factor in the softer-than-expected recession.

Public vs. Private Investments

Public investments are familiar and accessible to many, including stocks and mutual funds traded on stock exchanges. They offer high liquidity, enabling investors to buy and sell shares quickly. This broad accessibility makes public investments popular for those seeking straightforward investment strategies. This type of investment is open to all investors.

Private investments, on the other hand, involve placing capital into companies or assets not traded on public exchanges. This category includes private equity, venture capital, and direct investments in private companies. Although private investments have shown the potential for higher returns—outperforming the S&P 500 by 1% to 5% annually since 2009—they come with added risks. They are less transparent, often requiring investors to commit their funds for extended periods, sometimes up to a decade.

Multifamily Real Estate Investments

Multifamily real estate investments are a prime example of private investments that significantly rely on accredited and institutional investors for success. Unlike public investments, which are readily accessible through stock exchanges and financial markets, multifamily real estate deals often require substantial capital and are not available to the general public. Accredited and institutional investors are vital to the multifamily real estate sector. Their financial contributions drive market expansion and ensure stability in the asset class.

By capitalizing on these private investment opportunities, they play a crucial role in shaping the future of multifamily real estate and delivering value to investors and renters. At Viking Capital, we actively seek out and assess hundreds of deals each month to bring our investors the most promising deals. Our investment strategy focuses on pinpointing low-risk opportunities with substantial appreciation potential. This approach allows us to protect our investors’ capital while maximizing their long-term growth opportunities.