I received an email from the trade group ADISA this morning that was mostly a reprint of its letter to the Wall Street Journal. The letter responds to the WSJ's May 7, 2018, article on the risks posed by private placements, with a particular focus on bad securities brokers. The article used Woodbridge Group of Companies and the brokers that sold it as its examples. The reporting is detailed, with its prime implication being that brokers that sell private placements are likely to have regulatory issues. The ADISA letter states brokers that sell private placements are not bad. The truth is likely somewhere in the middle.
I wrote about Woodbridge last December, and included points that should serve as warnings to investors and brokers that are considering investing in or offering private placements. I won't repeat them all, but in short, if an investment sounds too good - offering 8% one-year returns (Woodbridge debt investment example cited in the article) in a 1% investment environment - it is too good; or you are taking on so much risk the return should be at least double. Think another way: why is a sponsor is willing to pay investors 8% when it should be able to borrow cheaper? Is that smart? Maybe, but probably not. The answer is that the sponsor likely can't get a loan or other cheaper forms of capital, which is why it is offering such high interest rates. And if the sponsor can't get cheaper financing, maybe the rate it is offering private placement investors is too low. If a bank won't lend to a sponsor, neither should you.
The WSJ article stated as fact that there were $710 billion in broker-sold private placements in 2017. This is just staggering. The private placements I see in the broker dealer world could not have totaled more than $10 billion in 2017, and that includes DST exchange products. What are the other $700 billion in private, broker-sold investments? Unfortunately, the biggest selling sponsor in the apparent tiny private placement world I see is one that offers products that pay investors an unsupported 8% distribution.
In today's or any day's investment environment there is no low risk way to earn 8% income from an investment. This is true no matter what a broker says or a fancy brochure states.