What this module covers
Experience in private markets is in large part pattern recognition: knowing the warning signs that tend to appear before an investment goes wrong. This module describes six categories of warning sign, how they tend to appear together, and what declining an investment involves. It builds on the checklist in module 13.
- Returns that do not fit their risk
- Pressure and urgency
- Lack of transparency
- Team instability
- Structural problems and conflicts
- Missing independent service providers
Returns that do not fit their risk
The first category is returns that seem too good to be true. An offer of "guaranteed 12% returns with no risk" is the standard example.
Private markets involve risk. A seller who claims otherwise is either misrepresenting the investment or does not understand it. Returns sit on a spectrum, and a higher return is paid for with higher risk, a longer time horizon or less liquidity, and usually some combination of the three.
When a stated return does not fit that logic (a high yield with claimed safety, or a quick return with supposedly low risk), something is wrong. Either the investment carries risks that are not being disclosed, or the return is not real.