Guide to Private Market Individual Investor Classifications: Accredited and Non-Accredited, Qualified Clients, and Qualified Purchasers

Explainer

Private market investments offer opportunities for growth and diversification beyond public markets. However, not all investors can participate equally. Regulatory frameworks classify investors into different categories based on their financial sophistication and ability to bear risk. This post will explore the key classifications: accredited investors, qualified clients, and qualified purchasers, among others. We'll define each, examine their investment capabilities, and identify suitable private market funds and alternatives. 

What are Accredited Investors? 

Accredited investors are individuals or entities allowed to invest in securities not registered with financial authorities. They qualify to gain access to a broad range of high-risk, high-reward investments such as private equity, venture capital, hedge funds, and real estate. (1) The criteria for being an accredited investor include: 

  • Income: An individual must have an annual income exceeding $200,000 ($300,000 for joint income) for the last two years, with expectations of the same for the current year. 
  • Net Worth: An individual must have a net worth of over $1 million, excluding the value of their primary residence. 
  • Professional: An individual can qualify as an accredited investor if they are an investment professional in good standing, a director or above-level executive of the company selling the securities, knowledgeable employees of the fund, or a family client or family member who qualifies as an accredited investor. 

Investment Capabilities of Accredited Investors 

Accredited investors can access a wide range of private market opportunities, including private equity, venture capital, hedge funds, and real estate. However, these investments can carry higher risks and require substantial due diligence. 

Suitable Investments for Accredited Investors 

  • Private Equity Funds: Suitable for those looking for high returns and willing to commit capital for extended periods. 
  • Venture Capital Funds: Ideal for investors seeking high-growth potential in startups. 
  • Hedge Funds: Appropriate for those seeking diverse strategies to hedge against market volatility. 
  • Real Estate Syndications: Suitable for investors interested in tangible assets and potential income generation. 

In its 2023 report, the SEC indicated that 24.3 million (18.5%) American households now qualify as accredited investors. That is a 16x increase over the number of households in 1982 when the SEC released its exemption for public registration thresholds under Regulation D. (1.1)  

What is a Qualified Client (QC)? 

Qualified Clients (QCs) meet higher financial thresholds than accredited investors. They are typically subject to fewer restrictions on fees that investment advisers can charge. These investors are well-positioned to benefit from more sophisticated investment strategies that can yield lower fees and custom solutions. The criteria for being a QC have recently been updated to reflect the effects of inflation. (2) They now include: 

  • Assets Under Management (AUM): At least $1.1 million under the management of the investment adviser. 
  • Net Worth: A net worth exceeding $2.2 million, excluding the primary residence. 

Investment Capabilities of Qualified Clients 

QCs can access more sophisticated investment strategies and structures, often benefiting from reduced performance fees and better alignment with investment managers.  

Suitable Investments for Qualified Clients 

  • Managed Accounts: Offer personalized investment strategies tailored to the client's risk tolerance and financial goals. 
  • Sophisticated Hedge Funds: These funds may employ complex strategies such as leverage, short selling, and derivatives. 
  • Custom Private Market Vehicles: Designed to meet specific investment objectives and risk profiles. 

About 6.6% of U.S. households can be classified as QCs. Moreover, nearly half of the accredited investor households (44.6%) are also classified as QC households. (2.1

What is a Qualified Purchaser (QP)?  

Qualified Purchasers (QPs) represent the highest tier of private market investors. As such, they can access exclusive, large-scale opportunities requiring significant capital commitments. These individual investors must meet stringent financial criteria to qualify as a QP. Most notably, they must be an individual or family owning investments of at least $5 million. (3

Investment Capabilities of Qualified Purchasers 

QPs have access to the broadest range of private market investments. They can participate in exclusive and large-scale opportunities that require substantial capital commitments. 

Suitable Investments for Qualified Purchasers 

  • Private Equity Mega Funds: Suitable for those looking to invest in large, well-established private equity firms with diversified portfolios. 
  • Institutional-Grade Real Estate: Includes large commercial properties and infrastructure projects. 
  • Direct Investments: Allows for significant stakes in private companies, providing influence and potential for high returns. 

Because the criteria for being a QP is so much higher, the percentage of U.S. households that qualify is significantly lower than the other investor types. SEC data from 2023 estimates that about 2.1% of American households are QPs. (3.1) Despite this small percentage, this category controls approximately 42% of all privately held household wealth. (3.2

What are Non-accredited Investors? 

Non-accredited investors do not meet the criteria for accredited status. Even though opportunities for participation in the private market are more limited than the other three investor types, non-accredited investors can still diversify their portfolios and participate in certain private market growth opportunities, including:   

  • Regulation A Offerings: Allows non-accredited investors to participate in small public offerings with certain limits. 
  • Crowdfunding Platforms: Enable participation in startups and real estate with lower minimum investments. 

Understanding the classification of private market investors is crucial for navigating the investment landscape. Accredited investors, qualified clients, and qualified purchasers each have distinct capabilities and access to different investment opportunities. By knowing which category you fall into, you can make informed decisions and leverage the right private market funds and alternatives to meet your financial goals. 

If you have questions about various private market investment assets, please get in touch. We host regular educational and information webinars and are glad to answer your questions individually.

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