Private Investments: What is a Qualified Purchaser?

Summary

Learn what it means to be a qualified purchaser, the requirements, and how this designation opens doors to different private investment opportunities.

Person learning about private investments

When it comes to investing, not all opportunities are accessible to everyone. Certain investments, particularly those in private markets, require investors to meet specific criteria due to complexity and potential risk of their investments. One such criterion is being a qualified purchaser. Understanding who qualifies and why this designation matters can sometimes open the door to different investment opportunities. Here we review some general definitions, explain the requirements for becoming a qualified purchaser, and show why the qualified purchaser designation is significant in the realm of private investing.

Private vs. public markets

Private market investments are not publicly traded and include private equity, private credit, venture capital, real estate, and infrastructure and are a subset of alternative investments. Also, unlike public investments listed on exchanges, private investments typically involve direct investment into a business, real estate property, or other private entity.

While publicly traded stocks and bonds usually get more media attention, private markets are larger in size and complexity. In fact, the universe of privately held assets is over five times larger than public markets.1 In addition, private asset classes have historically produced better returns after fees than U.S. equities and high-yield bonds (from 2000-2020).2 However, access to many offerings is limited to high-net-worth individuals and businesses that meet certain requirements.

Alternative investments

Qualified purchaser or accredited investor

The qualified purchaser designation is defined by the U.S. Securities and Exchange Commission (SEC) under the Investment Company Act of 1940 and opens the door to opportunities in private markets. There’s no formal process, exams, or registration to become one. Instead, becoming a qualified purchaser involves self-certification, where documentation proving that the investor has met the qualifying criteria is provided to the private fund or investment firm. Documentation typically includes financial statements, proof of assets, and other records of ownership.

Like an accredited investor, a qualified purchaser has reached a certain level of assets and sophistication and it’s assumed that they can bear the risks associated with higher-risk private investments. However, while an accredited investor must reach an income and net worth threshold, the requirements for qualified purchaser status are typically based on how much money they currently have invested. Amounts can range from $5 million to $100+ million or more, depending on the investor type:

  • An individual investor with $5 million or more;
  • A family, trust, or estate planning entity with $5 million or more;
  • An institutional investor (banks, insurance companies, pension funds, and corporations) or a foundation with $25 million or more
  • A qualified institutional buyer (Rule 144A) with $100 million or more.

In contrast, the accredited investor typically needs a net worth of $1 million (excluding their residence) or more than $200,000 in earned income during the past two years.

With status comes access

Private investments include a variety of different asset classes that can help accomplish financial goals like diversification, income, and growth. Private equity and venture capital, for example, can often offer growth and “equity-like” long-term returns. Private credit, real estate, and infrastructure sometimes may provide income or “bond-like” returns.

While investors can access more opportunities with the qualified purchaser status, it also allows greater flexibility for private funds and investment firms. In fact, some private funds and firms cater exclusively to qualified purchasers because there are fewer regulatory requirements compared to dealing with non-qualified investors; these private firms then have more flexibility in structuring their investment products and strategies.

Additional considerations

While a qualified purchaser can gain access to exclusive opportunities that aren’t available to mainstream investors, it can take some time and research to vet some of the more complex and high-risk offerings in the private markets. But it’s not just about higher due diligence. Qualified purchasers will want to be mindful of other challenges often associated with private markets:

  • Liquidity. Because they’re not traded on exchanges, private assets are illiquid and not easily bought or sold.
  • Transparency. Less regulatory oversight can also result in fewer required filings and less transparency when dealing with private investments compared to publicly traded ones.
  • Regulatory changes. Ongoing monitoring of any potential updates to qualified purchaser rules is essential to maintain compliance with current laws and regulations.

The bottom line

Whether it’s an individual investor, estate, or institutional entity, meeting the qualified purchaser criteria can significantly broaden the investment horizons and help enhance long-term portfolios. Mercer Advisors is committed to providing our clients access to investment opportunities in both public and private markets. If becoming a qualified purchaser is something you’re considering, reach out to a financial advisor or contact us to review the documentation required.

1 McKinsey Global Institute, “The Rise and Rise of the Global Balance Sheet,” 2021.

2 Burgiss, Yahoo! Finance, FRED Economic Data, as of February 2024, for January 1, 2000 to January 1, 2020.

Mercer Advisors Inc. is a parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.

All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. Content, research, tools and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. For financial planning advice specific to your circumstances, talk to a qualified professional at Mercer Advisors.

This information is provided for informational purposes only and is not intended as, a recommendation, or as an offer to sell, a solicitation of an offer to purchase or a recommendation of any interest in any fund or security. Any such offer can be made only via the relevant access fund’s formal offering documents. Investing in private funds is speculative and will entail substantial risks. Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy or product made reference to directly or indirectly, will be profitable or equal to past performance levels. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance and results of your portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client’s investment portfolio. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark.

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