Our investment vehicles constitute equity or debt in privately held companies. These are restricted from investment by members of the general public by U.S. law and Securities and Exchange Commission regulation. If you are an Accredited Investor or Qualified Purchaser you meet basic requirements to invest into private equity and debt like these.
It is important to note that all of these instruments are illiquid, and that you will not be able to access the principal for a defined period of time in the case of bonds, indefinitely in the case of direct equity investment, and for approximately 10 years in the case of a fund.
Private equity also carries considerable risk, you can lose up to the full amount of your investment in any of these instruments.
In addition to these caveats that apply to all private equity investments, we highlight a few advantages and disadvantages to help you choose which one could be the best add for your portfolio once you’ve determined you want to proceed with private equity, or “alternative” investments.
Defined Return - Bonds (Private Debt)
Bonds are utlra-simple. These are debt instruments. They are backed by corporate revenue and assets to provide downside protection. And it’s simple math – you get a defined rate of return, for a defined period of time.
Advantages
- You know exactly what return you will get on your investment and when you will get your payments.
Disdvantages
- Bond returns are taxed as regular income – the highest rate you will pay on any revenue.
- Bonds are illiquid – you cannot access your capital until the bond matures or you receive periodic interest payments.
- Bonds are not guaranteed. Like any private investment, you can lose up to your entire investment if the company in which you invest fails.
- High-quality bonds have relatively low rates of return compared to other private investments, often around the prime rate in the U.S. This is usually lower than the long-term average for the S&P 500. By contrast, higher return bonds carry more risk – which is why they are offering higher rates to secure your investment.
- Bonds are debt instruments and transactional. You gain no long-term interest in the company into which you invest.*
Growth (Private Equity)
The Paddock Group has opportunities for direct investment into its portfolio companies. These are through direct purchases of shares or indirect purchases through syndication with other invesstors into a special-purpose vehicle (SPV), usually a Limited Partnership.
Advantages
- On balance, private equity outperforms almost any other asset class – not least being the public markets represented by the S&P 500.
- Return is often in the form of appreciation of shares in the company. These are taxed as capital gains at a far lower rate than income for many investors.
- Directly issued shares from a C Corporation may be eligible for Qualified Small Business Stock exclusion in Sec. 1202 of the U.S. tax code if you hold them for five or more years before you sell them. This can exempt up to $10 million in gains, or 10 times your basis investment whichever is higher, from Federal taxes.
Disdvantages
- Private equity is illiquid. You may not access your capital unless and until the company in which you’ve invested has an exit of some sort. This could be through being acquired, being liquidated, or in the very rare occurence of an initial public offering (IPO).
- The overwhelming majority of startups fail which. This is why all funds and many private investors make smaller investments into a number of businesses instead of concentrating them into one or a small number of businesses.
Tax-Advantaged Returns - Venture Fund
The Paddock Group is offering in 2025 its first venture fund. Funds have advantages for high-net-worth individuals (HNWIs), family offices, donor-advised funds (DAFs) and other funds by selecting and managing portfolios of investment.
Advantages
- Unlike direct investment into individual companies, venture funds do on average provide positive returns to their Limited Partners (LPs)
- The Fund itself conducts diligence into the companies into which it invests. Funds can conduct diligence at scales that inidividual investors can find difficult to match.
- LPs participate in capital gains when company positions are sold, including pass-through of tax-excluded QSBS gains where applicable.
Disdvantages
- Funds have both management and performance-based fees that reduce the amount of your capital that can be invested into companies and that reduce the amount you will earn (e.g., 2% management fee and 20% carry for the General Partner, plus other fund expenses for legal, compliance, and auditing services)
- Fund managers, ourselves included, can have positions in companies that conflict with the goals of the Limited Partners (LPs) in their fund.
Which is Right for You?
First, are you an Accredited Investor? Do you have a Family Office or a Donor-Advised Fund? We are a Private Equity firm, so all of our investment vehicles are restricted from the general public through one or more U.S. regulations and are limited to individuals and entities like these.
Second, whether any of these investment vehicles are right for you is entirely dependent on your portfolio, investment objectives, need for liquidty, and risk tolerance. Our core value is transparency, so we would be delighted to share disclosures and objective data about our investment vehicles to help you and your financial advisor to determine if they are a good fit for your overall portfolio.